Private Student Lending Expansion And Higher Credit Quality Will Strengthen Future Outlook

Key Takeaways

• Focus on private student lending and improved credit quality is expected to boost revenue and enhance net margins.
  
• Selling loans and reinvestment strategies aim to bolster capital, drive EPS growth, and increase shareholder value.
  
• Net interest margin compression and PLUS loan program uncertainties could impact future earnings and revenue, while loan originations may pressure net margins and EPS.

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 expects continued growth in loan originations for 2025, with a focus on expanding its share in the private student lending market, which should boost revenue.
  
• Improvement in credit quality of originations with higher cosigner rates and FICO scores is anticipated to enhance net margins by reducing charge-off rates.
  
• Enhanced payment and loss mitigation programs are expected to lead to improved credit performance and lower net charge-offs, positively impacting earnings and margins.
  
• The company plans to sell approximately $2 billion in private education loans and additional loans in 2025, which will bolster capital and support earnings through strategic reinvestment or share repurchases.
  
• The strategic focus on strong balance sheet growth, EPS performance, and capital return through share buybacks is expected to drive higher earnings per share (EPS) and enhance shareholder value over the long term.

SLM Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SLM's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.0% today to 38.3% in 3 years time.
• Analysts expect earnings to reach $684.3 million (and earnings per share of $3.53) by about January 2028, up from $590.0 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 12.0x on those 2028 earnings, up from 10.2x today. This future PE is lower than the current PE for the US Consumer Finance industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 2.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.28%, as per the Simply Wall St company report.

SLM Future Earnings Per Share Growth

Risks

• The company's net interest margin (NIM) is experiencing compression due to funding rates catching up to asset yields, which could impact future earnings.
  
• There are uncertainties and potential risks associated with changes in the federal PLUS loan program, but no concrete proposals are yet available; these changes could alter market dynamics and impact revenue projections.
  
• Loan originations growth may increase the allowance for credit losses and operational costs, affecting net margins and EPS, as seen with growth exceeding estimates leading to pressures on EPS even though credit quality improved.
  
• The future loan sale strategy, while beneficial for capital generation, could impact balance sheet growth and long-term revenue potential if sale pricing becomes less favorable or if execution challenges arise.
  
• A potential increase in loan consolidations and the impact of macroeconomic factors, such as interest rate reductions, could contribute to reductions in revenue as loans move away from the portfolio.

Valuation

• The analysts have a consensus price target of $32.5 for SLM based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• 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 $684.3 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of $28.58, the analyst's price target of $32.5 is 12.1% higher.
  
• 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.