Sallie Mae Stays Neutral - Analyst Blog

On Jul 4, 2013, we reiterated our Neutral recommendation on Sallie Mae, Inc. (SLM). The decision was based on the proposed split of the company, which is anticipated to help Sallie Mae navigate through the tough regulatory environment. However, reduced net interest income and higher operating expenses were the downsides.

Why Neutral?

Sallie Mae's first-quarter earnings of 61 cents per share marginally beat the Zacks Consensus Estimate and surpassed the prior-quarter figure by 11%. Over the last 60 days, the Zacks Consensus Estimate for 2013 increased 1% to $2.49, whereas for 2014, it dropped 0.4%. As a result, Sallie Mae currently carries a Zacks Rank #3 (Hold).

To boost the company's long-term growth in the present economic environment, Sallie Mae announced the decision to split the company's present business into 2 parts, namely an education loan management business and a consumer banking business.

We expect the company to benefit from this, as with the division, management's focus will be on Sallie Mae's growing consumer banking business and on tackling its education loan portfolios. Together, these are expected to aid bottom-line growth in the near term.

Moreover, the company's business shift toward private student loans and direct channel loans as well as cost reduction measures – to counter the legislative impact – are positives for the stock. Extensive capital deployment activities also continue to reinforce investors' confidence in the stock.

However, the scope and profitability of Sallie Mae's businesses are exposed to risks arising from legislative and administrative actions. Further, we remain concerned about the run-off of the company's FFELP loan portfolio, which will weigh further on interest income. In addition, the deteriorating credit quality is a negative for the stock.

Other Stocks Worth Considering

Other financial institutions that are performing better than Sallie Mae include Capital One Financial Cor! p. (COF), Discover Financial Services (DFS) and Regional Management Corp. (RM). All these stocks carry a Zacks Rank #2 (Buy).