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Why Is Navient (NAVI) Up 6.7% Since Its Last Earnings Report?

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It has been about a month since the last earnings report for Navient Corporation (NAVI - Free Report) . Shares have added about 6.7% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is NAVI due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Navient Q1 Earnings Miss on Low Non-Interest Income

Navient’s first-quarter 2018 adjusted core earnings per share (EPS) of 40 cents missed the Zacks Consensus Estimate by a penny. The reported figure came in higher than the year-ago quarter tally of 36 cents.

Core earnings excluded the impact of derivative accounting treatment. It also excluded the impact of certain one-time items, including goodwill and acquired intangible asset amortization.

First-quarter results of Navient reflect lower revenues aided by decrease in net interest income and non-interest income. Moreover, expenses escalated. However, lower provisions were a tailwind.

The company reported core net income of $107 million in the quarter, flat year over year.

GAAP net income for the quarter was $126 million or 47 cents per share compared with $88 million or 30 cents per share in the year-ago quarter.

Fall in NII and Fee Income Recorded, Expenses Escalate (on core earnings basis)

Net interest income (NII) dipped 1.2% year over year to $330 million.

Non-interest income dipped 1.1% from the prior-year quarter to $179 million. Asset recovery and business processing revenues rose while servicing and other revenues declined.

Provision for credit losses decreased nearly 18.7% year over year to $87 million.

Total expenses rose 18.5% year over year to $282 million. The rise was primarily due to acquisition-related costs.

Segment Performance

Federal Education Loans: The segment generated core earnings of $141 million, up 9.3% year over year. Lower operating and income tax expenses were partially offset by decreased NII and fee income.

During the reported quarter, Navient acquired FFELP loans of $283 million. As of Mar 31, 2018, the company’s FFELP loans were $79.4 billion, down 6.9% year over year.

Consumer Lending: The segment reported core earnings of $50 million, up 31.6% from the prior-year quarter. Increased NII and lower provisions were the positives. Net interest margin was 3.23%, up 7 basis points year over year.

Private education loan total delinquencies of $1.3 billion were down 11.6% from the prior-year quarter.

As of Mar 31, 2018, the company’s private education loans totaled $22.9 billion, up slightly year over year.

Business Processing: The segment reported core earnings of $10 million, significantly up from $3 million in the prior-year quarter, aided by increase in fee income.

Source of Funding and Liquidity

In order to meet liquidity needs, Navient expects to utilize various sources, including cash and investment portfolio, issuance of additional unsecured debt, repayment of principal on unencumbered student-loan assets and distributions from securitization trusts (including servicing fees). It might also issue term asset-backed securities (ABS).

During the reported quarter, Navient issued $2 billion in FFELP Loan ABS, $507 million in private education loan ABS and $1.2 billion in unsecured debt. Also, the company repurchased $167 million of senior unsecured debt during the quarter.

Outlook

In 2018 management plans to achieve private education refinance loan originations of more than $1.5 billion.

Core EPS is expected to be in the range of $1.85-$1.95, excluding expenses associated with regulatory costs and restructuring expenses.

Organic revenues growth is expected to be nearly 30% in 2018.

Consumer lending NIM is anticipated to be about 3.25% in 2018. Further, management expects FFELP NIM for the full year to be in the range of 0.75-0.79%.

Net-charge offs are expected to trend higher for the rest of 2018 associated with the $3 billion portfolio that the company acquired in 2017. Also, provision for loan losses is expected to be in the mid to low $80 million range for the remaining quarters of 2018.

Operating expenses are expected to remain between $980 million and $1 billion, excluding expenses associated with regulatory costs.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter.

Navient Corporation Price and Consensus

 

Navient Corporation Price and Consensus | Navient Corporation Quote

VGM Scores

At this time, NAVI has a subpar Growth Score of D, though it is lagging a bit on the momentum front with an F. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our styles scores.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Notably, NAVI has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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