On Sep 30, 2013, we reiterated our Neutral recommendation on
). The decision was based on the proposed split of the company,
which will expectedly help Sallie Mae to navigate through the
tough regulatory environment. However, a decrease in net interest
income and higher operating expenses were the downsides.
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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.
Taken together, these are expected to drive 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.
Sallie Mae's second-quarter earnings of $1.02 per share
substantially beat the Zacks Consensus Estimate and came above
the prior-year quarter figure as well. Over the last 60 days, the
Zacks Consensus Estimate for 2013 increased 1% to $2.84, whereas
for 2014, it remained stable at $2.51. As a result, Sallie Mae
currently carries a Zacks Rank #3 (Hold).
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
Encore Capital Group, Inc.
Discover Financial Services
World Acceptance Corp.
). All these stocks carry a Zacks Rank #2 (Buy).