Shares of SLM Corp (NASDAQ:SLM) dived after the company spun off its loan management services into a separate firm called Navient Corp (NASDAQ:NAVI). But not so fast, say analysts at Evercore Partners. In a report dated April 30, 2014, analysts Bradley Ball, Anthony Cyganovich and Arren Cyganovich explain why they upgraded the loan provider to Overweight and initiated a new price target of $11 a share.
Spinoff gives SLM and Navient new opportunities
The analysts say both SLM Corp (NASDAQ:SLM) and Navient Corp (NASDAQ:NAVI) have open opportunities open to them because they can each pursue their own strategies independent from one another. They believe these separate strategies will “enhance shareholder returns over time.” While the Evercore team remains “cautious” on Navient because there is still uncertainty regarding “asset depletion and weakening earnings power going forward.”
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However, they’re positive on SLM because they think the company’s “strong growth and profit trajectories are clearer over the near- to immediate-term.”
SLM looks well positioned
The Evercore team believes SLM Corp (NASDAQ:SLM) is “uniquely well positioned” as the biggest private education loan originator, with a 50% share of the market. The firm’s brand is very well recognized, and it has a long track record of solid execution. SLM continues to hold relationships with more than 2,4000 schools, and the analysts believe it will be able to grow quickly but “in a disciplined way” through its experience in underwriting and servicing private education loans.
The company’s management is projecting $4 billion in loan originations this year, which would be a 5% year over year increase. They expect to sell between $1.5 billion and $2.5 billion, which would net to an estimated $7.8 billion in private education loans by the end of this year.
High growth, low risk
The Evercore analysts believe SLM Corp (NASDAQ:SLM) offers a low risk investment with high growth and returns. The firm targets at least a 20% growth in earnings and at least 15% growth in return on equity. They see this as being doable because the education finance industry is strong. In fact, they call the economics of private education loans as “compelling” in the long term.
They do say that there is some “significant but not insurmountable” regulatory and political risk associated with SLM Corp (NASDAQ:SLN). They say since the firm is a newly formed, independent “monoline” bank, the FDIC and UDFI have placed some restrictions on its capital and asset growth. Those restrictions could impact near term profits. In addition, because of recent political attention to educational credits and the fact that private education loans can’t be discharged in bankruptcy, there could be pressure to reduce the costs of these loans while broadening their availability.
Nonetheless, they think such loans are an important resource for college students, so they believe regulators will see this if they scrutinize the market.