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Navient (NAVI) Up 13.6% Since Last Earnings Report: Can It Continue?

Navient (NAVI) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

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This story originally appeared on Zacks

A month has gone by since the last earnings report for Navient (NAVI). Shares have added about 13.6% in that time frame, outperforming the S&P 500.

- Zacks

Will the recent positive trend continue leading up to its next earnings release, or is Navient due for a pullback? 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 Q2 Earnings Beat Estimates on Lower Provisions

Navient reported second-quarter 2021 core earnings per share of 94 cents, surpassing the Zacks Consensus Estimate of 85 cents. Also, the bottom line came in higher than the year-ago quarter figure of 92 cents.

Core earnings exclude the impacts of certain other one-time items, including mark-to-market gains/losses on derivatives, along with goodwill and acquired intangible asset amortization, and impairment.

The company’s performance was supported by increases in non-interest income and provision benefit. However, fall in net interest income (NII) and higher expenses are concerns. Further, private education loans declined during the quarter.

Navient’s GAAP net income came in at $185 million or $1.05 per share as against the net income of $125 million or 64 cents per share seen in the prior year.

NII Decreases, Provisions Fall (on Core Earnings Basis)

NII decreased 17.5% year over year to $141 million.

Non-interest income climbed 14.11% to $186 million. This upswing is mainly attributable to higher asset recovery and gains on sales of loans.

Provision for loan losses was a benefit of $1 million as against the provision of $44million witnessed in the prior-year quarter.

Total expenses flared up 18.7% to $254 million. Higher operating expenses and rise in restructuring/other reorganization expenses primarily resulted in this upswing.

Segment Performance

Federal Education Loans: The segment generated core earnings of $113 million, down 22.6% year over year. Lower revenues were partly offset by a fall in expenses.

As of Jun 30, 2021, the company’s FFELP loans were $55.6 billion, down 2.3% sequentially.

Consumer Lending: The segment reported core earnings of $96 million, which increased 10% from the year-ago quarter’s $87 million. Provision benefits and growth in revenues supported the segment’s performance. Net interest margin was 2.95%, shrinking 25 basis points.

Private education loan delinquencies of 30 days or more of $505 million were up 18.5% from the prior-year quarter.

As of Jun 30, 2021, the company’s private education loans totaled $19.7 billion, down marginally from the prior quarter. In addition, Navient originated $1.29 billion of private education refinance loans during the reported quarter.

Business Processing: The segment reported core earnings of $29 million, up significantly from the $6 million recorded in the year-ago quarter. Higher fee revenues led to this upside.

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.

During the reported quarter, Navient issued $2.1 billion in term ABS and retired $692 million in unsecured debt. Notably, it had $1.45 billion of cash as of Jun 30, 2021.

Capital Deployment Activities

In the second quarter, the company paid out $27 million in common stock dividends.

During the reported quarter, Navient repurchased shares of common stock for $200 million. As of Jun 30, 2021, there was $300 million of share-repurchase capacity remaining.

Outlook

Subsequent to Navient’s second-quarter results, the company retired an additional $750 million of unsecured debt that was set to expire in January 2022, which will result in an expected repurchase loss of $20 million in the third quarter.

As a greater number of borrowers will transition into repaying statuses, management expects delinquency levels to revert toward the pre-pandemic levels. Management expects the delinquency rate to be in the mid- to low 3% range. Charge-offs which are also contingent on the product mix, are expected to be in the low 1% range.

2021 earnings (on core earnings basis) is expected to be in the range of $4.20-$4.30 per share. The outlook excludes regulatory and restructuring costs, a favorable interest rate environment and includes the announced debt repurchases and utilizing the remaining share repurchase authority of $300 million.

At least $5.5 billion in combined refinancing and in-school originations in 2021 is expected.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Navient has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. 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 D. 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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