Optimized Underwriting And Share Buybacks Will Secure Future Stability

Key Takeaways

• Enhanced collection practices and loss mitigation programs are likely to improve credit performance and positively impact net margins.
  
• Loan sales and strategic share buybacks are boosting earnings per share, even with stable overall profitability.
  
• Deteriorating credit performance and economic uncertainty pose significant risks to earnings, while volatile student loan ABS markets could unpredictably impact revenue.

Catalysts

Through its subsidiaries, originates and services private education loans to students and their families to finance the cost of their education in the United States.

• Sallie Mae has implemented enhanced collection practices and loss mitigation programs, optimizing enrollments and underwriting capabilities, which are expected to improve credit performance and potentially reduce net charge-offs. This is likely to impact net margins positively.
  
• The company executed a $2 billion loan sale with significant gains and plans additional sales, which should free up capital and could be used to fund share buybacks or business growth, supporting earnings per share (EPS) growth.
  
• A targeted and programmatic approach to share buybacks using proceeds from loan sales is reducing outstanding shares, thus increasing EPS even if overall profitability remains stable.
  
• Operational efficiencies and a focus on driving better unit economics are contributing to reduced noninterest expenses despite higher origination volumes, potentially leading to improved net margins.
  
• Sallie Mae is focusing on moderate, predictable balance sheet growth while maintaining strong capital return through potential dividend growth and continued share repurchases, supporting overall earnings growth.

SLM Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SLM's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 41.8% today to 42.2% in 3 years time.
• Analysts expect earnings to reach $772.8 million (and earnings per share of $3.73) by about May 2028, up from $605.3 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 10.1x on those 2028 earnings, down from 10.8x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.7x.
• Analysts expect the number of shares outstanding to decline by 4.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.83%, as per the Simply Wall St company report.

SLM Future Earnings Per Share Growth

Risks

• Sallie Mae's net interest income decreased by $12 million from the prior year quarter, which could impact net margins and overall earnings if this trend continues.
  
• The provision for credit losses increased to $23 million from $12 million in the prior year quarter, which could imply potential risks to earnings if loan growth is not accompanied by improved credit performance.
  
• Despite loan modifications, early-stage delinquency rates showed an increase year-over-year, indicating potential risks to revenue if delinquencies persist or increase.
  
• The macroeconomic environment remains uncertain, and any negative changes could impact the financial metrics, including revenue and net interest margin.
  
• The market for student loan ABS has been volatile, and if spreads widen again, it may reduce the gains from future loan sales, impacting earnings and revenue unpredictably.

Valuation

• The analysts have a consensus price target of $33.0 for SLM 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 $35.0, and the most bearish reporting a price target of just $29.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $772.8 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 8.8%.
• Given the current share price of $31.13, the analyst price target of $33.0 is 5.7% 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.