Why Is Navient (NAVI) Down 13.3% Since Last Earnings Report?

A month has gone by since the last earnings report for Navient (NAVI). Shares have lost about 13.3% 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 on High Fee Income

Navient Corporation pulled off a positive earnings surprise of 37% in second-quarter 2019. Core earnings per share of 74 cents surpassed the Zacks Consensus Estimate of 54 cents. Also, the bottom line came in higher than the year-ago quarter figure of 49 cents.

Core earnings excluded the impact of certain other one-time items, including restructuring and regulatory-related expenses.

Second-quarter results of Navient benefited from a rise in fee income and lower provisions. However, lower net interest income was a key headwind. Further, expenses flared up. Moreover, year-over-year decline in loans was a major drag.

GAAP net income for the quarter was $153 million or 64 cents per share compared with $83 million or 31 cents per share in the year-ago quarter.

NII down, Fee Income Escalate, Expenses Flare Up (on core earnings basis)

Net interest income (NII) dipped 7.2% year over year to $296 million.

Non-interest income surged 45.8% to $242 million. Asset recovery and business processing revenues, other income and gain on debt repurchases increased.

Provision for loan losses plunged nearly 39.3% to $68 million.

Total expenses escalated 19.2% to $242 million from the year-ago quarter.

Segment Performance

Federal Education Loans: The segment generated core earnings of $131 million, down 11.5% year over year. Higher adjusted expenses, partly muted by elevated revenues, posed as a headwind.

During the reported quarter, Navient acquired FFELP loans of $43 million. As of Jun 30, 2019, the company’s FFELP loans were $68 billion, down 11.2%.

Consumer Lending: The segment reported core earnings of $85 million, up 28.8% year over year. Lower provisions and expenses were the positives. Net interest margin was 3.22%, up 1 basis point.

Private education loan delinquencies of 30 days or more of $1.1 billion were down $237 million from the prior-year quarter.

As of Jun 30, 2019, the company’s private education loans totaled $21.6 billion, down 4.4%.

Business Processing: The segment reported core earnings of $7 million, down 12.5% year over year. Higher expenses led to this downside.

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 $1.9 billion in term ABS. Also, the company repurchased $138 million of senior unsecured debt.

Capital Deployment

During the reported quarter, the company repurchased 9.6 million shares for a total cost of $126 million and paid $37 million as dividends to shareholders. Notably, shares worth $207 million remain in existing share repurchase authorization.

Outlook

In 2019, management plans to achieve net interest margin in federal education loan segment to be low to mid 80’s basis points. Also, charge-off rate in the segment is expected at 0.08-0.10%.

Net interest margin in consumer lending segment is expected at 3.10-3.20%. Also, charge-off rate in the segment is expected at 1.6-1.8%.

Core EPS is expected to be in the range of $2.43-$2.48, excluding expenses associated with regulatory costs and restructuring expenses.

In Business Processing segment EBITDA margins in the high teens is expected.

Core earnings return on equity is expected to be in mid-teens. Core earnings efficiency ratio is likely to be around 50%. Tangible net ration is anticipated between 1.23x and 1.25x.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 6.05% due to these changes.

VGM Scores

Currently, Navient has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, 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 trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Navient has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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