We are downgrading our recommendation on SLM Corporation (SLM) to Neutral.
The company, commonly known as Sallie Mae, reported first quarter core earnings of 39 cents per share, ahead of the Zacks Consensus Estimate of 29 cents, on the back of higher revenues from interest income. It also reported a significant increase in federal loan origination.
However, the recent legislation forbidding private sector companies from making new federal student loans after June 30 remains a serious concern. This legislation puts an end to the Federal Family Education Loan Program (FFELP) and would severely impact student lenders such as Sallie Mae, whose traditional role would change and whose loan portfolio would become heavily skewed toward higher-risk private student loans.
The company is currently undergoing a significant restructuring of its operations to better align its cost structure with future revenue projections. As a result, it is incurring upfront costs for such implementations.
First quarter results for Sallie Mae were reduced by $19 million or 4 cents per share attributable to after-tax restructuring and asset impairment costs related to the legislation. At that time, the company said that it would also reduce its workforce by 2,500 people.
Nevertheless, though the recent legislation will challenge the company’s current business model, we expect Sallie Mae to benefit from the Department of Education’s servicing contract, under which it would service and collect government guaranteed loans.
Given its low cost business structure, we believe this will support its profitability and produce an acceptable risk-adjusted return and provide it with an edge over its peers. As such, we have a Neutral recommendation on the shares.
Read the full analyst report on “SLM”
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