Is Sallie Mae Undervalued?

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Nicholas Kitonyi

The stock is up 15%

Shares of credit services provider SLM Corp. (NASDAQ:SLM) gained more than 15% on Thursday to trade at around $14.08. The Delaware-based student loan company announced strong fiscal fourth-quarter and full-year 2020 earnings after markets closed on Wednesday.

Also known as Sallie Mae, the stock has more than doubled over the last six months after a run of good quarterly results. At the current price of about $14.09, the stock is now trading at its highest level since 2007.

A look at the numbers

SLM posted adjusted earnings growth of 248.48% to $1.15 per share, which surpassed the consensus analyst estimate of 33 cents. Net interest income for the quarter fell to $367 million, down from $419 million reported a year ago.

In the full-year results, SLM’s net interest income came in at $1.48 billion, down from $1.62 billion reported in 2019. Non-GAAP net income stood at $863 million, or $2.23 per share. This compares to a net income of $547 million reported in the previous year.

The company’s impressive rise in earnings is attributable to a substantial decline in expenses. Non-interest expense for the quarter fell 12.7% to $124 million.

SLM provided earnings guidance of $2.20 to $2.40 per share for fiscal 2021 while private education loan originations are expected to increase by 6% to 7%.

Valuation

From a valuation perspective, shares of SLM appear to be trading at an attractive price-earnings ratio of 10.02. This indicates a substantial undervaluation based on the Peter Lynch earnings line of 15.

Based on the 2021 median earnings guidance of about $2.30 per share, the company’s forward price-earnings ratio is now about 6.13. This supports the current case of potential undervaluation. Looking further forward— and factoring in expected earnings for the next five years, SLM’s PEG ratio is about 0.43. This again suggests that the company offers a high potential for growth in the coming years.

Some of the company’s closest peers include Navient Corp (NASDAQ:NAVI), which trades at a PEG ratio of 0.49. Its trailing price-earnings ratio is 5.45 while the forward price-earnings ratio is pinned at 3.71. They are both better than SLM’s. Nelnet Inc. (NYSE:NNI) and Capital One Financial Corp. (NYSE:COF) trade at relatively higher price-earnings ratios that are well above the Peter Lynch value.

In summary, shares of SLM appear to be relatively undervalued based on the Peter Lynch earnings line. The company also appears to trade at highly competitive valuation multiples when compared to close peers. This could be an exciting value play in 2021.

Disclosure: No positions in the stocks mentioned.

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About the author:

Nicholas Kitonyi

Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi’s Website

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