Shares of SLM Corporation (SLM), 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.
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 increasing profitability.
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. (FIBK), TriCo Bancshares (TCBK) and Mainsource Financial Group (MSFG). All these have a Zacks Rank #1 (Strong Buy).