Navient (NAVI) Down 5.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Navient (NAVI). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Navient due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Navient Q3 Earnings Beat Estimates, Provisions Fall

Navient’s third-quarter 2018 adjusted core earnings per share (EPS) of 53 cents surpassed the Zacks Consensus Estimate of 50 cents. However, the reported figure came in below the year-ago quarter tally of 55 cents.

Core earnings excluded the impact of derivative accounting treatment. It also excluded the impact of certain other one-time items, including goodwill and acquired intangible asset amortization.

Third-quarter results of Navient benefited from a decline in provisions. However, lower revenues along with escalated expenses were the key headwinds. Moreover, year-over-year decline in loans was another offsetting factor.

The company reported core net income of $140 million in the quarter, down 7.9% from $152 million a year ago.

GAAP net income for the quarter was $114 million or 43 cents per share compared with $176 million or 64 cents per share in the year-ago quarter.

NII and Fee Income Fall, Expenses Escalate (on core earnings basis)

Net interest income (NII) dipped 5.2% year over year to $327 million. Lower interest income from education loans along with higher interest expenses led to the decline.

Non-interest income fell 17.3% to $196 million. Asset recovery and business processing revenues along with servicing revenues declined.

Provision for loan losses decreased nearly 19% year over year to $85 million.

Total expenses rose 7.6% to $256 million from the year-ago quarter, primarily due to rise in direct operating expenses.

Segment Performance

Federal Education Loans: The segment generated core earnings of $148 million, down 5.7% year over year. Higher NII was partially offset by higher operating expenses and lower fee income.

During the reported quarter, Navient acquired FFELP loans of $164 million. As of Sep 30, 2018, the company’s FFELP loans were $74.3 billion, down 11.4% year over year.

Consumer Lending: The segment reported core earnings of $72 million, up 20% year over year. Lower provisions and expenses were the positives. Net interest margin was 3.35%, down 22 basis points.

Private education loan delinquencies of 30 days or more of $1.4 billion were up $98 million from the prior-year quarter.
As of Sep 30, 2018, the company’s private education loans totaled $22.4 billion, down 4.3%.

Business Processing: The segment reported core earnings of $4 million, stable year over year. Increase in fee income was offset by higher expenses.

Source of Funding and Liquidity

In order to meet liquidity needs, Navient expects to utilize various sources, including cash and investment portfolio, issuance of additional unsecured debt, repayment of principal on unencumbered student-loan assets and distributions from securitization trusts (including servicing fees). It might also issue term asset-backed securities (ABS).

During the reported quarter, Navient issued $992 million in FFELP Loan ABS and $632 million in private education loan ABS. Also, the company repurchased $86 million of senior unsecured debt during the quarter.

Outlook

In 2018, management plans to achieve private education refinance loan originations of at least $2.9 billion.

Core EPS is expected to be in the range of $1.90-$1.95, excluding expenses associated with regulatory costs and restructuring expenses.

Organic revenues growth is expected to be nearly 30% in 2018.

Consumer lending NIM is anticipated to be about 3.25% in 2018, on expectations of two additional rate hikes in September and December.

Further, management expects FFELP NIM for the full year to be in the range of 0.75-0.85%.

Provision expenses of around $75 million per quarter are expected for remaining 2018. FFELP provisions for second half of the year are expected to be nearly $10 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Navient has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Navient has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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