Nelnet, Inc. (NNI) is getting its finances in order ahead of planned July 1 federal changes in student loans. While the stock is cheap, at 5.1x forward earnings, 2011 is the “unknown” for the company as the new regulations really bite.
Nelnet finances education in the United States. The company is in the process of transition given that as of July 1, the federal government will no longer be providing loans. In order to handle the change, the company has been focusing its energy on its fee-based segments and loan servicing.
Recently, according to the Associated Press, Moody’s affirmed its rating on the company but raised its outlook to “stable” from “negative” given the company’s emphasis on fee-based projects as a substitute for the loans.
Nelnet Surprised on the First Quarter by 23.9%
On May 10, Nelnet reported first quarter results and beat the Zacks Consensus for the third time in the last 4 quarters. Earnings per share were $1.14 compared to the consensus of 92 cents. It earned 64 cents in the year ago quarter.
The emphasis on fee-based revenue was obvious even in the company’s press release on the quarter as it highlighted that this area saw 14% growth in the first quarter to $50.7 million compared with the first quarter of 2009.
Nelnet has a service contract on student loans with the Department of Education which was initiated in September 2009. It was servicing $8.2 billion in loans for 1 million borrowers under the contract. The contract term is apparently for 4 years.
Zacks Consensus Estimates Show the Jitters Over 2011
Even with the fee-based revenue rising for the first quarter, analysts apparently feel that the current earnings cannot be sustained in 2011.
While they see earnings growth of 5.8% in 2010, by 2011, they see contraction in earnings by 25%.
The Zacks Consensus Estimates for both years have risen recently, however. The 2010 Zacks Consensus is up 12 cents to $4.17 in the last month while the 2011 Zacks Consensus has risen by 4 cents to $3.10 in the same period.
Value Fundamentals
Nelnet has several factors that make it a solid value stock. In addition to the low single-digit P/E ratio, it also has a price-to-book ratio of 1.2 which is well below the parameters for a value stock.
Its price-to-sale ratio, at 1.1, is well below the industry average of 1.8.
The company also has other attractive fundamentals. Its 1 year return on equity (ROE) is 27% whereas the industry sports an ROE of just 7.9%.
Nelnet also pays a dividend, with a current yield of 1.3%. This is no small potatoes, as its industry pays, on average, nothing.
Nelnet is a Zacks #1 Rank (strong buy) stock.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service.
