Divestitures And Cost Reductions Will Strengthen Future Financial Health

Key Takeaways

• Strategic divestitures and reduced overhead will streamline operations, enhancing net margins and boosting financial health.
  
• Anticipated federal loan policy changes may expand private lending opportunities, increasing Navient's market and revenue.
  
• Regulatory changes, restructuring costs, and reliance on interest rates may hinder net earnings growth and delay financial benefits for Navient.

Catalysts

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

• Navient's strategic transformation includes divesting non-core business segments, such as government services, to streamline operations and reduce costs, which should improve net margins.
  
• The sale of non-strategic assets like the healthcare business provides capital for share repurchases and debt reduction, enhancing earnings per share (EPS) through financial restructuring.
  
• Navient anticipates significant growth in its Consumer Lending segment, aiming to increase origination volume by 30% in 2025, driven by a focus on graduate students, which should bolster revenue.
  
• Proposed changes in federal loan policies, such as the potential elimination of loan forgiveness programs and the Grad PLUS Loan program, may open opportunities for private lending, potentially expanding Navient's market and increasing revenue.
  
• Further cost reduction efforts, particularly in shared service and overhead expenses, are projected to improve future cash flows and net margins, strengthening the financial health of the company.

Navient Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Navient's revenue will decrease by 18.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.4% today to 32.6% in 3 years time.
• Analysts expect earnings to reach $151.5 million (and earnings per share of $1.78) by about March 2028, up from $131.0 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 10.5x on those 2028 earnings, down from 10.9x today. This future PE is lower than the current PE for the US Consumer Finance industry at 11.1x.
• 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 11.41%, as per the Simply Wall St company report.

Navient Future Earnings Per Share Growth

Risks

• The divestiture of government services, while improving cost efficiency, may initially reduce revenue streams and create uncertainty about transitioning services, potentially impacting net margins.
  
• Regulatory changes and restructuring costs linked to the Consumer Financial Protection Bureau's lawsuit and other strategic transformations could hinder net earnings growth.
  
• High levels of prepayment activity have accelerated cash flows but also increased the amortization expense of loan premiums, affecting net earnings.
  
• The lingering transition services agreements and associated costs could prolong expenses into 2026, delaying financial benefits and impacting net margins in the short term.
  
• The reliance on interest rate environments and potential lack of anticipated rate cuts could suppress expected refinanced loan originations and subsequent revenue growth.

Valuation

• The analysts have a consensus price target of $14.05 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 $18.0, 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 2028, revenues will be $464.9 million, earnings will come to $151.5 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $13.91, the analyst price target of $14.05 is 1.0% higher. 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.