Shrinking Enrollments And Rising Credit Risks Will Erode Margins

Key Takeaways

• Declining college enrollment, federal reform uncertainty, and run-off portfolios threaten future loan origination, revenue growth, and overall business stability.
  
• Rising competition, higher credit risk, and stagnant wages are likely to erode net interest margins and reduce the company's profitability.
  
• Regulatory shifts and efficiency initiatives strengthen Navient's profitability outlook, buoyed by expanding graduate loan demand and robust access to capital for scalable growth.

Catalysts

Provides technology-enabled education finance and business processing solutions for education, health care, and government clients in the United States.

• Shrinking U.S. college enrollment, accelerating due to demographic trends and increasing skepticism about the ROI of a traditional degree, threatens to erode long-term student loan origination volumes, directly impairing both future revenue growth and loan servicing opportunities.
  
• Persistent and intensifying political pressure for student debt forgiveness and comprehensive reform of the federal student loan system jeopardizes the core business model and addressable market for private student loan servicers like Navient, creating material uncertainty around loan demand and future revenue streams.
  
• Ongoing run-off and prepayment of legacy FFELP and private loan portfolios, combined with a lack of new federal servicing contracts, is likely to result in a steadily declining interest income base, making topline revenue contraction increasingly likely year over year.
  
• Stagnant or falling real wages for recent graduates are likely to drive up credit risk and delinquency rates, ultimately raising provisions for credit losses and shrinking net margins over the next several years, despite any near-term improvements.
  
• Increasing competition from well-capitalized fintech and digital-first lenders, leveraging advanced AI underwriting and cutting-edge customer acquisition, will drive down net interest margins and erode Navient's pricing power in both origination and refinance markets, placing persistent pressure on earnings and profitability.

Navient Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Navient compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Navient's revenue will grow by 7.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.7% today to 34.3% in 3 years time.
• The bearish analysts expect earnings to reach $247.6 million (and earnings per share of $2.94) by about August 2028, up from $33.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.6x on those 2028 earnings, down from 39.3x today. This future PE is lower than the current PE for the US Consumer Finance industry at 10.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Navient Future Earnings Per Share Growth

Risks

• The elimination of the federal Grad PLUS loan program and increase in federal borrowing limits are set to substantially increase demand for private in-school graduate loans, where Navient already enjoys a roughly 20% market share and strong school distribution, resulting in potentially significant long-term revenue and earnings growth.
  
• The company has demonstrated strong loan origination growth, particularly in high-quality graduate segment loans, with origination totals more than doubling year-over-year, which, if sustained, can drive higher net interest income and scale advantages in the long run.
  
• Navient has achieved substantial operating expense reductions through business divestitures, outsourcing, and corporate efficiency initiatives, with firm progress toward its $400 million cost target, which supports improvement in net margins and profitability.
  
• The successful execution and oversubscription of their inaugural in-school asset-backed securitization, featuring high advance rates and investor enthusiasm, indicates robust access to efficient capital markets for growth funding, supporting both revenue and the ability to scale balance sheet assets.
  
• Regulatory changes that extend the life and cash flows of legacy FFELP assets, combined with a normalized interest rate environment and low prepayment speeds, have produced higher net interest margins and more predictable cash flows from existing portfolios, benefiting both revenue stability and earnings power.

Valuation

• The assumed bearish price target for Navient is $10.09, which represents two standard deviations below the consensus price target of $14.4. This valuation is based on what can be assumed as the expectations of Navient's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $721.0 million, earnings will come to $247.6 million, and it would be trading on a PE ratio of 4.6x, assuming you use a discount rate of 12.3%.
• Given the current share price of $13.05, the bearish analyst price target of $10.09 is 29.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.