We have recently downgraded our recommendation on shares of SLM Corp. (SLM) (better known as Sallie Mae) to Neutral.
We believe that the company's leading position in the student lending market, expense curtailment initiatives and the acquisition of federal student loan assets bode well. Dividend reinstatement and share buyback efforts also inspire investors’ confidence in the stock.
However, the positives have already been factored in the current price.
First Quarter Earnings
Sallie Mae reported first-quarter 2011 core earnings of $260 million or 48 cents per share, beating the Zacks Consensus Estimate of 41 cents. The result compares favorably with prior-year quarter's core earnings of $215 million or 40 cents per share.
The results were primarily driven by a decline in loan loss provisions and improved net interest income. Concurrent with the earnings release, Sallie Mae declared a quarterly dividend of 10 cents per share on its common stock, the first time since early 2007. In addition, the company announced a share repurchase authorization of up to $300 million of outstanding common stock.
Outlook
Management at Sallie Mae 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 concern and by the end of fourth quarter 2011, management expects to achieve a run rate of $250 million.
Going Forward…
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). But we think that Sallie Mae'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.
Additionally, Sallie Mae shares currently have a Zacks #3 Rank, which translates into a short-term 'Hold' recommendation.
NELNET INC CL-A (NNI): Free Stock Analysis Report
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