Student Lender Sallie Mae Soars on ‘Radical’ Capital Shift

(Bloomberg) -- Shares of SLM Corp., known as Sallie Mae, surged after its earnings report highlighted a shift in capital management, including selling loans to fund $600 million in share buybacks, that Wedbush called “radical.”

Analysts hailed the moves, which they viewed as designed to goose share prices. On Thursday, the stock rallied as much as 30%, the most since 2008.

Sallie Mae’s equity was likely “significantly undervalued,” while its assets were “fairly valued,” CEO Raymond Quinlan said on the company’s conference call. “We will continue to exercise our discretion in buying that stock until such time as the valuation approaches what we believe it should be.”

Quinlan also said that the “need for higher education is high, it will continue, it will expand and it will evolve,” as distance learning, international, boot camp and other programs grow. “And so our outlook is that regardless of who gets elected in the United States and the election, we have a bright future.”

Here’s a sample of the latest commentary:

Jefferies, John Hecht

“SLM announced major strategic shifts which reduce credit risk, simplify the business and enable rapid capital accumulation tied to a major capital return program,” Hecht wrote in a note.

He added that fourth-quarter results showed “puts and takes,” but that the “bottom line beat and relatively consistent fundamentals are a modest positive.” Upside to Jefferies’s core earning-per-share estimate came from net interest income and expenses, while credit was in-line with Hecht’s forecast, and net interest margin, or NIM, and originations were a “tad below.”

“Importantly, the company is discontinuing personal loan originations as it also pivots to a partial-loan sales strategy,” he said. “We see the quarter and strategic update as big positives.” Hecht rates the stock buy, with a Street-high price target of $16.

KBW, Sanjay Sakhrani

SLM plans “bold moves” for 2020 with loan sales and share buybacks, Sakhrani wrote. Those moves will “in effect put pressure on the market to appropriately value its shares,” he said, adding that “the shares are cheap, the company is a leader in an attractive industry” and the company’s plans are “potentially value creating.”

Even so, he sounded a note of caution: “While we like this strategy, we are concerned that investors might grow frustrated with the lack of growth and/or the transition impacts on earnings-per-share when growth resumes,” with rising provisions and a lack of gain-on-sale revenues, he said. Sakhrani rates SLM outperform, with a $12 target.

Wedbush, Henry Coffey

“After thoroughly digesting CECL, SLM is announcing a radical shift in capital management, earnings-per-share guidance that is significantly above the current mark, and the discontinuation of a product line we never liked (for them), installment lending,” Coffey wrote in a note.

“CECL” refers to new accounting rules that analysts had anticipated would create “noise” in SLM’s reporting.

Coffey rates shares outperform, with a price target of $13.

Compass Point, William Ryan

SLM created “big headlines, but also a lot to digest,” Ryan wrote.

The company’s 2020 earnings-per-share outlook topped consensus estimates because of the capital actions, he said. Ryan also flagged SLM’s shift to a “core earnings” metric in 2020, likely accounting for the impact of CECL, and noted that SLM said allowance for losses as a percentage of private education loans under CECL was now expected to be 6.7%, up from the prior 6.5% view during its third quarter earnings call and an initial 6% last summer.

He added that SLM’s origination view for 2020 may be “slightly ambitious” after a year-over-year decline in the fourth quarter. Private education credit deterioration was in line with expectations, he said.

Ryan rates SLM neutral, with a $10 target.

Read more: Dec. 23, Student Lender SLM Is a Trump Stock Play, Compass Point Says

To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Debarati Roy

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