We have reiterated our Neutral recommendation on Nelnet Inc. (NNI).
The company reported earnings per share of $1.09, excluding items, which surpassed the Zacks Consensus Estimate of $1.06 and improved from $1.01 in the prior-year quarter.
The company benefited from revenue diversification through fee-based businesses, a drop in operating expenses and loan loss provisions.
Concurrent to the earnings release, the company announced a 3-cent hike in its quarterly dividend to 10 cents.
Although the student loan reform law has barred companies like Nelnet and SLM Corp. (SLM), better known as Sallie Mae, from originating federal student loans since July 2010, Nelnet has expanded in areas that are independent of the federal program. Increasing revenues from its fee-based business and servicing of loans for the Department of Education should support its earnings.
Nelnet was one of the four private sector servicers awarded with a student loan servicing contract in June 2009 by the Education department to service all federally owned student loans. In June 2010, the company also began servicing new loans originated under the Direct Loan Program. The company has experienced an increase in loans servicing and has reported a growth in revenues from the servicing contract.
Though its capital position is solid, we believe that concerns over implementation of the recent financial reform act and a protracted economic recovery remain. Also, expenses are expected to increase with the rise in the volume of loan servicing. Yet, the dividend increase gives a boost to investors’ confidence in the stock.
Hence, the positive and negative seem balanced for the stock and the Neutral recommendation is retained. Nelnet shares currently have a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.
