Navient Continues To Grow Inorganically, Legal Costs A Woe

On Nov 24, we issued an updated research report on Navient (NASDAQ:NAVI) . The company continues to benefit from strong position in the educational loan industry. Further, its inorganic growth strategies and improving economic conditions are likely to bolster top line. However, higher expenses remain a concern.

Buoyed by strong fundamentals, Navient reported an earnings beat in third-quarter 2017. The results benefitted from higher non-interest income, which was partially offset by lower net interest income and higher expenses.

Navient has been focused on boosting its business. Recently, it acquired Earnest — a San Francisco-based financial technology company. Navient took over education refinancing loans of more than $500 million as part of this deal. 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) and the deal is expected to contribute 9 cents to earnings per share in 2017.

Further, the stock remains undervalued as its trailing-12-month price-to-book and price-to-earnings ratios remain below the respective industry averages. It currently has a Value Score of A.

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

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. In October 2017, a lawsuit was filled against Navient, accusing it of conducting deceptive practices. It was alleged of having provided loans to students with low graduation rates, a high percentage of which have not been repaid.

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 lost 24.9% year to date against 2.8% growth of the industry it belongs to.

The Zacks Consensus Estimate for current-year earnings has remained stable at $1.76 over the past 30 days. As a result, the stock carries a Zacks Rank #3 (Hold).

Stocks to Consider

Washington Federal (NASDAQ:WAFD) carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the company’s current-year earnings has been revised around 1% upward for 2017 in the last 60 days. Also, its share price has risen 5.6% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

First Commonwealth Financial Corporation (NYSE:FCF) currently has a Zacks Rank of 2. Its earnings estimates for 2017 have been revised 2.5% upward over the last 60 days. Further, in the past six months, the company’s shares have gained 15%.

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