), also known as Sallie Mae, closed at $25.95 on Dec 23,
recording a year-to-date return of 53.1%. The company's leading
position in the market, impressive capital deployment and
strategic initiatives to split its business were the driving
forces behind the price appreciation. Hence, keeping its shares
in your portfolio will not be a bad idea.
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However, we are not very confident about the above positives
translating into further rise in the stock price going forward,
given the sluggish economic recovery and stringent regulatory
requirements that would weigh on Sallie Mae's interest income.
Consequently, adding more shares of the company to your portfolio
is not advisable.
Why this Stance?
Sallie Mae's third-quarter 2013 earnings per share marginally
beat the Zacks Consensus Estimate and were higher than the
prior-year quarter figure. Lower loan loss provisions
primarily boosted the company's better-than-expected results.
However, decreased net interest income and higher operating
expenses are concerns.
In an attempt to enhance long-term growth amid the challenged
economic environment, Sallie Mae announced the decision to split
its present business into two parts: an education loan management
business and a consumer banking business. The strategic plan will
aid bottom-line growth, as management's focus will be on the
company's booming consumer banking business.
Moreover, we are encouraged by Sallie Mae's focus on cost
reduction and improving operating efficiencies. Further, the
company has been actively vending its residual interests in SLM
Student Loan Trusts due to legislative changes. We believe the
sale will result in lower operating and overhead costs, thereby
Nevertheless, a stressed macro economy and stricter regulations
will likely affect Sallie Mae's growth. Moreover, the company's
top line is expected to remain compressed due to pressure on
interest income. Also, we remain concerned about the
deteriorating credit quality.
Additionally, the Zacks Consensus Estimate has remained stable
for Sallie Mae. Over the last 30 days, the Zacks Consensus
Estimate for 2013 as well as 2014 was stable at $2.91 and $2.48,
respectively. Thus, Sallie Mae now has a Zacks Rank #3 (Hold).
Other Stocks to Consider
If you are interested in the finance sector, you could consider
better-ranked stocks like
First Interstate Bancsystem Inc.
Mainsource Financial Group
). All these have a Zacks Rank #1 (Strong Buy).