Nelnet (NNI 0.43%) has a $19 billion debt load -- more than six times larger than its market cap. It's the sort of debt load that scares off a lot of investors. Not so fast, says Motley Fool contributor Lou Whiteman. This is student loan debt, and most of it is guaranteed by the federal government. He sees Nelnet as a safe play with a lot of upside.
In this episode of "Beat and Raise," Fool contributors Brian Withers, Taylor Carmichael, and Lou Whiteman talk. Lou explains why he loves Nelnet. This segment was recorded on Sept 2.
Brian Withers: Lou, I think the last time I asked this question you brought this stock in. [laughs] You must really like this stock.
Lou Whiteman: Well, let me see. The last time I was asked this question, I think Jason was the host. But it was last week and I said Microsoft, so I wanted to make sure I didn't repeat that. I don't have more than like a one-week memory though, Brian. [laughs] I'm going to go with Nelnet and it's a little bit of obscure one. The ticker is NNI, hopefully well-known to Fools. This is a $3 billion market cap company even at its near all-time high, sitting on a pile of government guaranteed loans that will generate over $2 billion in cash over the next decade. You can account for almost the entire market cap and then some with the student lending business, which includes those government loans, private loans and servicing, and you get the rest of the business basically for free. What do you get?
You get a business services unit that does payment processing and financial management for K to 12 schools, you get a college business that does tuition plans and payment processing. Let me tell you, I'm on the board of a school that uses their fax management project. It is sticky on both sides, it would be a pain for the school to rip out and every one of us parents has an account that we'd have to redo. Once it is in it's one of these businesses, once it's there, you've got to screw up to get fired. They also have a venture capital portfolio with investments include Huddle, which is a fast-growing app that connects high school athletes with college coaches, which is hugely popular. They have a fiber-to-home business that they just sold off half of at evaluation about double what they're carrying on its book. The market just misunderstands this company, they misunderstand the balance sheet.
They see a $3 billion company with $20 billion of debt, and they run. Normally they should. But in this case, 99 percent of that debt is government secured. It's a great time to look at this company because it is misunderstood. It may be misunderstood for another 10 years, but I love this company even at its valuation.
Brian Withers: Lou, now it's coming back to me. I remember. This is one of those when you say the market has this wrong, it's got tons of optionality. Each one of these businesses sounds like they're executing and firing on all cylinders. It's really hard for the market, especially with, I don't know if it breaks out, the revenue results in the gross margins for all of these businesses, but it's really hard for the market to fairly value a company like this, that has multiple different avenues for growth.
Lou Whiteman: Yeah, I think that's right. They do a decent job breaking it down. There's a few risks. Like I say, you look at the balance sheet, you see $20 billion in debt, that does look scary. For a lot of screeners, that's it. Secondly, student loan forgiveness was a big presidential issue last year. We'll see what comes to that. I think most people have looked at this would say that that would help Nelnet, not hurt it, because these are guaranteed loans.
It's not going to evaporate, it's going mean the government writes them a check now instead of slowly over the next 10-15 years, getting $2 billion in income streams coming down. But the third risk is this is a trust-the-jockey story. This is basically the value proposition is they're going to be given a ton of cash and let's hope they can invest it well. They have a decent track record with that, but if you buy this company, you are betting that they will continue to redeploy the cash as well as they have in the past.
Brian Withers: Very cool.
Taylor Carmichael: Can I ask, how does COVID affect this company and like all the school closings. Does it hurt them at all?
Lou Whiteman: Part of their business, especially on the college student loans, the servicing side. There's been a lot of deferment of debt. That has cost them in the near-term there. That's mostly deferment, so it's just the servicing revenue has been coming in. It's interesting, they actually took some of their employees on that business and put them into the unemployment claims and helping other areas that were in need in their home state, and actually generated revenue that way during the worst COVID. On the K to 12 side, very few schools shut down. Most of them just went on virtually, so the tuition keeps rolling no matter what. There was some blips with some of their businesses, especially for us with the long term mindset, there hasn't really been a permanent worsening of their business because of COVID.
Brian Withers: Excellent. Lou brings a small cap, love it. If you're interested, this one's a $3 billion market cap.
Lou Whiteman: In a bunch of services. I think Fintech Fortunes most recently, but yeah.
Brian Withers: There you go. Opportunity to get in on the ground floor.
