Navient Benefits From Diversification, Legal Costs Rise

Navient Corporation (NASDAQ:NAVI) continues to benefit from strong position in the educational loan industry. Further, its expansion strategies and improving economic conditions are likely to bolster the top line. However, higher expenses remain a concern.

Navient has been focused on boosting its business through inorganic growth strategies. In November 2017, it acquired Earnest, which helped it cater to customers who were unable to get finance from traditional banks. In August 2017, the lender extended its reach beyond the educational loans by acquiring Duncan Solutions — provider of technology-enabled parking and toll services. In April 2017, it obtained educational loan portfolio from JPMorgan (NYSE:JPM).

Also, an increasing awareness for educational benefits and declining unemployment rate are likely to aid Navient’s growth.

Further, the stock remains undervalued as its price-to-book and price-to-earnings ratios remain below the respective industry averages. It currently has a Value Score of B.

However, the company remains exposed to increasing expenses. Several litigations issues and strict regulatory scrutiny in the U.S. student loan industry are likely to affect its financials.

Navient’s top line remains under pressure due to the declining FFELP (Federal Family Education Loan Program) loan portfolio. Interest earned on FFELP loans is primarily indexed to one-month LIBOR rates, whereas the cost of funds is mainly indexed to three-month LIBOR rates. In the rising interest rate environment, this difference in timing may create pressure on net interest margin for FFELP loans. On the other hand, rise in interest rates might also lower Navient’s floor income.

Shares of Navient have gained 5.1% over the past yeat, underperforming 17.1% growth of the industry it belongs to.

The Zacks Consensus Estimate for current-year earnings of $1.87 has been revised slightly downward over the past 30 days. The stock currently carries a Zacks Rank #3 (Hold).

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