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Students are Returning to Campus: Is This Deep Value Stock a Buy?

By Courtney Carlsen – Aug 26, 2021 at 8:58AM

Key Points

  • Enrollments at universities and colleges were hurt last year during the coronavirus pandemic.
  • Private student loan lender Sallie Mae has seen its stock deeply discounted as a result.
  • The company is encouraged by students returning to campus as well as repayment trends.

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This value stock was hurt when college enrollment dropped amid the pandemic last year.

Students are back on college campuses this fall after almost a year and a half of online or hybrid learning brought on by the coronavirus pandemic. One company happy to see these students return is private student lender SLM (SLM -0.64%), better known as Sallie Mae.

The student lender recently announced its earnings, and management expressed optimism for the second half of the year with updated guidance for both earnings and charge-offs. As economic conditions improve and students return to class, is this deep value stock a buy?

The pandemic brought uncertainty and a discounted stock price

Sallie Mae is one of the leading providers of student loans in the country. The company established an industrial bank in 2005 so that it could fund and originate private student loans, or loans that are not insured or guaranteed by the federal government. These private loans help students and families bridge the gap between public loans, scholarships, and the cost of college.  

Many students made the decision to forgo college during the 2020-21 school year, causing enrollment rates to dip and putting pressure on Sallie Mae's business. In the spring 2021 semester, enrollment fell 3.5% from the year before, with undergraduate student enrollment down 4.9%.  

A professor gives a lecture to a classroom of college students.

Image source: Getty Images.

Another impact from the pandemic was that many borrowers went into forbearance status. With unemployment rates up, there was much uncertainty about borrowers' ability to repay student loans, and as a result the stock has traded at a discount for over a year now. At Wednesday's closing price, Sallie Mae was trading at a price-to-earnings (P/E) ratio just under 5 and a forward P/E ratio of 6.8. For perspective, this places its P/E ratio on the lower end of its history. Over the past 10 years, the company has had an average P/E ratio of 13, and over the past five years its P/E ratio has been around 11.7.  

Trending in the right direction

In the second quarter, net interest income of $339 million was down 2.9% from the same quarter last year as result of slower deposit growth. However, other income was up 91.2% from last year to $48.5 million, resulting in growth of total non-interest income of 81.8% to $52.3 million. Net income was $140.2 million, up from its $85.2 million loss in the same quarter last year. One of Sallie Mae's biggest drivers of growth this year was the sale of $3.2 billion in private education loans, giving it a gain of $403 million in the first six months of the year.  

A positive sign for the lender was improved provisions for credit losses, which were reduced by $282 million compared to last year. Management is encouraged by the trends it has seen this year. Private education loan annualized charge-offs were 1.16%, compared to 1.29% in this year's first quarter. Private education loans in forbearance were 3%, an improvement from 3.7% in the first quarter and 9.3% from the same quarter last year. 

What to expect going forward

Sallie Mae management is encouraged by the reopening strategies across college campuses, with 85% of its reported schools returning to a normal in-person model, 14% having a hybrid residential and online model, and only 1% fully online. It believes that students returning to campus will help attendance numbers, which declined over 3% last year. Additionally, the unemployment rate for the average college graduate was at 3.3%, an improvement from the 3.8% rate in the first quarter of 2021 and a good sign for borrowers' ability to pay off their private loans successfully. 

Management had been cautioning investors that delinquencies and charge-offs were expected to deteriorate as pandemic support programs ended. However, based on continued performance, Sallie Mae management reduced its outlook for expected defaults. While charge-offs of 1.5% for the remainder of the year would be higher than in the first half, it marks a big improvement from what charge-offs were expected to be months ago. Loan portfolio charge-offs are expected to be between $215 million and $225 million -- a big improvement from Sallie Mae's previous guidance of $260 million to $280 million. Management also updated 2021 earnings guidance, raising its expected earnings per share (EPS) range of $3.15 to $3.25 after previously guiding for $2.95 to $3.15. 

Solid long-term growth despite headwinds

One thing that has me cautious isn't the company, but the broader college enrollment trends. According to the National Student Clearinghouse Research Center, total higher education enrollment was 19.2 million in the spring 2011 semester. By the spring of 2021, enrollment was down to 16.6 million -- representing an annual decline of almost 1.5%. This isn't exclusively a pandemic trend -- enrollment stood at 17.3 million in spring 2019.

Despite this, Sallie Mae has seen steady revenue growth of 14% compounded annually over the past five years.  Also, its share of the market was up to 56%, up 8%, according to the most recent data from MeasureOne. The company is seeing favorable trends for its business, and looks to be a solid value stock with its cheap P/E ratio. While the broader trend is concerning, Sallie Mae has done a good job of taking market share and has shown its ability to grow over the years despite the trend, making it a value stock worth further consideration.

SLM is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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