Here's Why You Should Hold on to Navient (NAVI) Stock Now
Navient Corporation’s NAVI recurring business model and significant cash-flow-generating capabilities in the upcoming years from education loans will aid revenues. However,NAVI’s top line faces a potential threat from limited servicing fee growth opportunities. Also, a rising interest rate environment, escalating costs and high debt levels are major headwinds.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised marginally downward in the past 30 days.
In the past six months, shares of the company have gained 5.7% against the industry’s decline of 16.5%.
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The company currently carries a Zacks Rank #3 (Hold).
Navient is an eminent portfolio holder of Private Education Loans and education loans insured or guaranteed under the Federal Family Education Loan Program (FFELP). The specialized focus is advantageous to Navient, making it a leading student-loan company. The company is growing its in-school originations. In the long term, management expects the demand for refinancing loans to rebound once direct federal loan repayments begin and enhance its business prospects.
Navient’s recurring business model also aids top-line growth. Notably, the company’s education loan portfolio generates significant cash flows. Projected annual cash flows from private education loans and FFELP loans are $0.8 billion and $0.9 billion, respectively, for 2023.
The company’s business risk reduction and simplification efforts bode well. Navient transferred all its ED servicing contracts to Maximus in October 2021. With this move, Navient eliminated an operationally-risky business and amplified its focus on domains outside government student loan servicing. In 2022, Navient will provide transition services to Maximus and receive offsetting payments to cover associated costs.
However, we remain cautious due to limited growth opportunities for Navient. Lost servicing revenues related to the sale of ED servicing contracts will affect its servicing revenues in the upcoming quarters. Also, if Navient fails to acquire new loans or expand or develop alternative sources of revenues to replace or enhance its declining revenues from the FFELP loan portfolio, its top line will be under pressure.
As of Sep 30, 2022, the company held long-term borrowings worth $63.99 billion, along with cash and cash equivalents of only $1.36 billion. Given such a high debt burden and limited liquidity, Navient's capital deployment activities keep us apprehensive.
NAVI aims to improve operating efficiency by taking cost-control initiatives by increasing automation, incorporating artificial intelligence and rationalizing the real-estate footprint. However, ongoing product and technology investments will escalate expenses. Also, a rise in litigation costs might affect the company’s bottom-line growth in the days to come.
Lastly, the current rising interest-rate environment may put pressure on the net interest margin for Federal Education Loans and Consumer Lending segments. Relatively higher interest rates will lower Navient’s floor income, affecting margins, and reduce refinance loan origination volumes.
Stocks to Consider
A couple of better-ranked finance stocks are Hancock Whitney Corporation HWC and F.N.B. Corporation FNB. At present, HWC and FNB carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Hancock Whitney’s 2022 earnings has moved marginally upward over the past 30 days. So far this year, HWC’s shares have gained 9.6%.
The Zacks Consensus Estimate for F.N.B. Corp’s 2022 has been unchanged over the past 30 days. FNB’s shares have rallied 16.2% in the year-to-date period.
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