We are reiterating our Outperform recommendation on SLM Corp. (SLM) following a detailed analysis of the company’s third-quarter 2011 earnings results.
SLM Corp., commonly known as Sallie Mae, reported third quarter core earnings of $188 million or 36 cents per share, in line with the Zacks Consensus Estimate. The results compare unfavorably with the prior-year quarter’s core earnings of $202 million or 37 cents per share.
However, on a GAAP basis, Sallie Mae reported third-quarter 2011 net loss of $47 million or 10 cents per share, comfortably lower than the loss of $495 million or $1.06 per share in the comparable quarter last year. Favorable results at Sallie Mae were primarily driven by an increase in student loan originations, improved credit quality with declines in student loan delinquencies and operating expenses.
The loss stemmed from a $371 million unrealized, mark-to-market loss on certain derivative contracts recognized in the reported quarter. Notably, the year-ago quarter’s results included a $269 million unrealized, mark-to-market loss and a $660 million impairment of goodwill and intangibles.
For full-year 2011, Sallie Mae management expects to generate core earnings of $1.80 per share and anticipates private education loan originations of $2.7 billion. Reduction of expenses is the company’s primary focus. Moreover, the company expects to achieve its quarterly operating expense target of $250 million by fourth-quarter 2011.
We believe that Sallie Mae’s leading position in the student lending market, its cost curtailment initiatives and the federal student loan assets acquisition augur well. Sallie Mae successfully accomplished the acquisition of $25 billion in securitized federal student loan assets from The Student Loan Corporation, a Citigroup Inc. (C) subsidiary, in December 2010. The acquisition boosted Sallie Mae’s customer base by approximately 1.3 million and promises earnings accretion ahead.
However, pausing new federal student loan origination to comply with the legislation would affect revenue generation at student lenders like Sallie Mae and Nelnet Inc. (NNI). However, we believe that the company’s diversifying efforts coupled with an economic recovery, though at a sluggish pace, would bolster its earnings by expanding its private education loan business and reducing its loan loss provision expenses. Capital deployment efforts also give a boost to investors’ confidence in the stock.
However, Sallie Mae shares currently retain its Zacks #3 Rank, which translates into a short-term Hold rating.
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