Navient (NAVI) to Report Q4 Earnings: What's in the Cards?
Zacks Equity Research
Updated
Navient Corporation NAVI is scheduled to report fourth-quarter and full-year 2016 results tomorrow, after market close.
The Wilmington, DE-based loan management, servicing and asset recovery company recently made headlines after it was hit with a lawsuit by the Consumer Financial Protection Bureau (CFPB). According to the release by the CFPB, Navient – the nation’s largest servicer of both federal and private student loans – has been accused of “systematically and illegally failing borrowers at every stage of repayment.” In response, Navient stated that it will “vigorously defend” itself against the allegations.
The company’s third-quarter 2016 core earnings outpaced the Zacks Consensus Estimate and improved year over year as well. Results were aided by lower provision for credit losses as well as higher non-interest income. On the flip side, net interest income decreased while expenses remained stable in the quarter.
Earnings Whispers
Our quantitative model doesn’t call for an earnings beat this time around. Here is why:
A stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) – for increasing chances of an earnings beat. Unfortunately, this is not the case here, as elaborated below.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks ESP: The Earnings ESP for Navient is -2.27%. This is because the Most Accurate estimate of 43 cents stands below the Zacks Consensus Estimate of 44 cents.
Zacks Rank: Navient’s Zacks Rank #4 (Sell) further lowers the predictive power of ESP. We caution investors against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement.
What to Expect?
Revenues: The student loans market has turned into one of the biggest consumer debt markets of the nation. Though conditions in the financial markets have been challenging lately, Navient’s consistent efforts to acquire student loan portfolios, both Federally Guaranteed Student Loans (FFELP) as well as Private Education Loans, should lend some support to the quarterly results.
Further, the company’s efforts to grow asset recovery revenues, with focus beyond student loan platforms, should support revenues at its business services segment. However, the quarter might reflect lower revenues due to decrease in education loan-related asset recovery volume, mostly tied with the Department of Education contract which expired in Feb 2015.
Management had guided business services revenues in between $620 million and $650 million for the year.
Expenses: Navient’s several ongoing initiatives to improve efficiency should ease the expense burden. However during the third quarter earnings call conference, management noted that due to shift of $2.7 billion of Navient-owned FFELP loans to Navient servicing platform during the fourth-quarter, the company would incur an additional $7 million of one-time operating expenses in the quarter. Nevertheless, management expects operating expenses below $930 million for 2016.
Margins: FFELP net interest margin (NIM) is expected to remain in the low to mid 80s for full-year 2016 and in the low 80s for the fourth quarter. Private student loan NIM is expected to be in the mid-340s for the year, and is projected to be in the low 320s in the fourth quarter. The guidance was based on management’s assumptions tied with updated repayment, cost of funds from its LIBOR based debt and no rise in the prime rate during the fourth quarter.
Due to the impact of the LIBOR basis risk and the additional one-time $7 million expense, management expects EPS (earnings per share) to be at the midpoint of the $1.82 to $1.87 range for 2016.
Navient’s activities during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 44 cents over the last seven days. The estimates reflect a year-over-year decline of 9%.
Stocks that Warrant a Look
Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.
Nasdaq, Inc. NDAQ is scheduled to release results on Jan 31. It has an Earnings ESP of +1.06% and carries a Zacks Rank #3.
CME Group Inc. CME is slated to release results on Feb 2. It has an Earnings ESP of +1.85% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
CBOE Holdings, Inc. CBOE has an Earnings ESP of +3.45% and sports a Zacks Rank #1. The company is slated to release results on Feb 6.
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