SLM's Q3 Earnings Fail to Excite (Fool Plate Special) October 13, 1999

An Investment Opinion

SLM's Q3 Earnings Fail to Excite

By Brian Graney (TMF Panic)
October 13, 1999

It has been more than two years since SLM Holding Corp. (NYSE: SLM), the parent of government-sponsored enterprise Sallie Mae, was privatized with much fanfare. Emerging victorious from a well-publicized proxy fight was Albert Lord, whose "Committee to Restore Value" led the privatization charge. Lord promptly took the CEO throne and promised sweeping changes at the sleepy student loan financing business, including a move into the loan origination business.

At the time, shareholder serfs bowed down before their new Lord, anxious to reap the benefits of their leader's aggressive plans. Two years later, the occupants of the SLM fiefdom are still waiting patiently for the payoff, as the company's stock price has barely budged. Lord's sword was enough to excite the troops during the heat of the proxy battle, but it has been unable to generate much excitement from the stock monarchs on Wall Street.

Another example of this trend was provided today when SLM posted its third quarter financial results. For the period, earnings on a "cash basis" (which excludes gains on sales from securitizations) rose to $0.77 per share from $0.68 per share a year ago, which was in line with the First Call mean estimate. Excluding $2.6 billion in student loans that were picked up with the July acquisition of Nellie Mae, loan volume for the quarter was $3 billion, down 14% from a bang-up Q2 but up 50% from a year ago. Ending managed student loans of $53.7 billion were up 9% sequentially and 19% year-on-year.

All in all, it was a pretty good quarter of internally generated growth for SLM. In recent periods, the quality of the company's earnings per share has been criticized as benefiting too much from cost-cutting measures and sharecount reductions. Those arguments don't hold a water this time around, as operating expenses ticked up 6% during the period while shares outstanding fell by less than 1%. Still, investors let out a collective yawn and the stock fell slightly this morning.

The key to SLM's future growth prospects -- and most likely its near-term share price performance -- will be its moves in the student loan origination area, where it can boost non-interest income by collecting origination fees. The origination business was a major plank in Lord's privatization platform, as Sallie Mae at the time was only authorized to purchase student loans in its original role of making and maintaining a secondary market. Banks and other private lenders were the main originators, but that all changed with Sallie Mae's privatization in 1997.

Today, SLM competes right alongside the private lenders and government direct lending programs in the $33 billion annual federal student loan origination market, which has been expanding at a 7% compounded annual rate over the last five years according to CIBC World Markets. In Q3, SLM's originations grew 6% from a year ago to $1.6 billion. The company's Laureate Internet-based student loan origination platform was behind $250 million of the total, processing more than 50,000 loans on 54 campuses.

In future quarters, the growth of the origination business and the acceptance levels of Laureate will be the key areas for investors to keep their eyes on. Having a strong online system may end up creating a competitive advantage that Lord & Co. can leverage into higher non-interest income growth down the road, but right now SLM's shareholders continue to feel like peasants left in a field.