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Why Is Navient (NAVI) Down 2.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Navient (NAVI). Shares have lost about 2.2% 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 catalysts.

Navient Q2 Earnings Beat Estimates, Provisions Fall

Navient's second-quarter 2018 adjusted core earnings per share (EPS) of 49 cents surpassed the Zacks Consensus Estimate by a penny. The reported figure came in higher than the year-ago quarter tally of 43 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.

Second-quarter results of Navient benefited from a decline in provisions. However, lower revenues along with escalated expenses were key headwinds.

The company reported core net income of $131 million in the quarter, up 6.5% from $123 million in the year-ago quarter.

GAAP net income for the quarter was $83 million or 31 cents per share compared with $112 million or 39 cents per share in the year-ago quarter.

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

Net interest income (NII) dipped 7% year over year to $319 million.

Non-interest income fell 10.3% year over year to $166 million. Asset recovery and business processing revenues declined, while servicing revenues rose slightly.

Provision for loan losses decreased nearly 6.7% year over year to $112 million.

Total expenses rose 11.7% to $203 million from the year-ago quarter.

Segment Performance

Federal Education Loans: The segment generated core earnings of $148 million, up 7.2% year over year. Lower operating and income tax expenses were partially offset by decreased NII and fee income.

During the reported quarter, Navient acquired FFELP loans of $58 million. As of Jun 30, 2018, the company's FFELP loans were $76.6 billion, down 11% year over year.

Consumer Lending: The segment reported core earnings of $66 million, up 65% year over year. Increased revenues and lower provisions were the positives. Net interest margin was 3.21%, down 7 basis points.

Private education loan delinquencies of 30 days or more of $1.3 billion were down $119 million from the prior-year quarter.

As of Jun 30, 2018, the company's private education loans totaled $22.6 billion, down 6.6% year over year.

Business Processing: The segment reported core earnings of $8 million, up 33.3% from $6 million in the prior-year quarter, aided by increase in fee income.

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 $997 million in FFELP Loan ABS, $521 million in private education loan ABS and $550 million in unsecured debt. Also, the company repurchased $1.3 billion of senior unsecured debt during the quarter.

Outlook

In 2018, management plans to achieve private education refinance loan originations of at least $2 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 an upward trend in fresh estimates.

VGM Scores

At this time, Navient has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

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

The company's stock is suitable solely for value based on our styles scores.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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