We are upgrading our recommendation on the shares of SLM Corp. (SLM), better known as Sallie Mae, to Outperform. We believe that the stock price has significant upside potential owing to its leading position in the student lending market, expense curtailment initiatives and acquisition of federal student loan assets.
Dividend reinstatement and share buyback efforts also inspire investors’ confidence in the stock.
Sallie Mae’s first quarter 2011 core earnings of 48 cents per share outpaced the Zacks Consensus Estimate of 41 cents. The results also compare favorably with prior-year quarter’s core earnings of 40 cents.
Favorable results were primarily driven by a decrease in loan loss provisions and increased net interest income. The company also announced its first common stock dividend of 10 cents since 2007 and a $300 million share repurchase program.
Management expects to generate core earnings of $1.70 per share in 2011, a full-year private credit provision of $1 billion, operating expenses of $1.2 billion and private loan volume of $2.5 billion. Reducing operating expenses is the company’s primary focus and by the end of fourth quarter 2011, management expects to achieve a run rate of $250 million.
Sallie Mae successfully acquired $26 billion in securitized federal student loan assets from The Student Loan Corporation, a Citigroup Inc. (C) subsidiary, in December 2010. The acquisition expands Sallie Mae’s customer base by approximately 1.3 million and promises earnings accretion ahead. This transaction will be accretive to 2011 earnings and beyond, and the company will continue acquiring federal student loan portfolios.
While 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), we think that Sallie Mae’s diversifying efforts and a recovery of the economy, though at a sluggish rate, would bolster its earnings by expanding its private education loan business and reducing its loan loss provision expenses.
Additionally, currently, Sallie Mae shares retain a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ recommendation.
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