Cost-Cutting And Share Repurchases Will Strengthen Financial Position In Education Finance

Key Takeaways

• Outsourcing loan servicing and the divestment of Government Services may increase costs and reduce revenue, negatively affecting net margins.
  
• Delays in government contract funding and a goodwill write-down suggest lower future earnings, potentially prolonging negative impacts on margins.
  
• Navient's strategic moves, including cost-cutting, asset sales, and share repurchases, may enhance financial stability and profitability, boosting investor confidence.

Catalysts

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

• Navient's decision to outsource loan servicing to a third party could result in increased IT and shared service expenses, impacting future net margins negatively as these costs will remain even after the divestment of Government Services.
  
• The divestment of Government Services, which relies heavily on shared services, may lead to lower-than-expected cost reductions and potentially declining revenue streams due to recent developments on key contracts, negatively affecting both revenue and net margins.
  
• The uncertainty and potential delay in Congressional funding approval for a major Government Services contract could further erode future revenue streams and net margins in that division.
  
• The anticipated lower rate environment into 2025 might compress net interest margins in the Federal Education Loan segment due to the assets resetting daily while the liabilities lag, affecting overall earnings.
  
• The company's recent goodwill write-down in Government Services suggests it anticipates lower future earnings from these operations, which could further lead to prolonged negative impacts on revenue and net margins.

Navient Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Navient's revenue will decrease by -28.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.6% today to 71.0% in 3 years time.
• Analysts expect earnings to reach $267.1 million (and earnings per share of $3.15) by about December 2027, up from $79.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.3x on those 2027 earnings, down from 20.5x today. This future PE is lower than the current PE for the US Consumer Finance industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 7.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Navient Future Earnings Per Share Growth

Risks

• Navient's loan origination growth and successful cost-cutting measures, such as outsourcing loan servicing, could improve revenue and net margins, contributing positively to their financial outlook.
  
• The settlement with the CFPB may reduce future legal expenses and contingent liabilities, thereby potentially improving net margins and profitability.
  
• The sale of Navient's healthcare business for $369 million could strengthen their balance sheet, giving them extra cash to invest in loan growth or share repurchases, which could boost earnings per share.
  
• The lower prepayment levels in their Federal Education Loan segment suggest stability in revenue from interest income, which positively impacts net interest margins.
  
• Navient's planned increase in share repurchases could enhance earnings per share by reducing the number of shares outstanding, potentially offsetting any negative impacts on share price.

Valuation

• The analysts have a consensus price target of $14.67 for Navient based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $17.0, and the most bearish reporting a price target of just $11.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $376.4 million, earnings will come to $267.1 million, and it would be trading on a PE ratio of 6.3x, assuming you use a discount rate of 10.9%.
• Given the current share price of $15.05, the analyst's price target of $14.67 is 2.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.