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Navient Gains From Inorganic Strategies, Legal Costs Rise

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Navient Corporation (NAVI - Free Report) continues to benefit from its strong position in the educational loan industry. Further, its expansion strategies and improving economic conditions are likely to bolster the top line. However, higher expenses remain a concern.

Navient has been focused on boosting its business through inorganic growth strategies. In May 2018, the lender entered into an agreement with First Data Corporation, under which the latter will become the primary provider of technology solutions for Navient’s loan portfolio. Navient believes that this deal to have a positive impact on its long-term cost structure. In November 2017, it acquired Earnest, which helped it cater to customers who were unable to get finance from traditional banks.

Also, an increasing awareness for educational benefits and declining unemployment rate are likely to aid Navient’s growth.

Further, the stock is undervalued as its price-to-book and price-to-earnings ratios remain below the respective industry averages. It currently has a Value Score of B.

However, the company remains exposed to increasing expenses. Several litigations issues and strict regulatory scrutiny in the U.S. student loan industry are likely to affect its financials.

Navient’s top line remains under pressure due to the declining FFELP (Federal Family Education Loan Program) loan portfolio. Interest earned on FFELP loans is primarily indexed to one-month LIBOR rates, whereas the cost of funds is mainly indexed to three-month LIBOR rates. In the rising interest rate environment, this difference in timing may create pressure on net interest margin for FFELP loans. On the other hand, rise in interest rates might also lower Navient’s floor income.

Shares of Navient have gained 1.1% so far this year against 3.6% decline witnessed by the industry it belongs to.

The Zacks Consensus Estimate for current-year earnings of $1.92 has remained stable over the past 30 days. The stock currently carries a Zacks Rank #3 (Hold).

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