Not every good investment is an exciting, disruptive company that's changing the world. Some of the best investments are well-run companies making life a little easier for their customers and increasing sales along the way. Student-loan processor Nelnet (NNI -0.15%) fits into the second category. It's one of the best-kept secrets on Wall Street, with a market cap of only $3.6 billion, even as it gained 33% over the past year. Shares still trade just below $100, and if you have that available for investing after paying your bills and saving for an emergency fund, you should consider buying a share.
More than student loans
Nelnet is known (if it's known at all) for its huge student-loan book, although it operates several businesses that all together make it a financial-services heavyweight. It doesn't originate new loans at this point, though it does carry almost $20 billion of loans on its balance sheet and it expects $2.2 billion in loan repayments over the next few years. So it is relying on its other businesses to provide new avenues for growth.
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Nelnet is more like a conglomerate than a single company, running several different businesses, some of which feed off of each other and others that are distinct. It operates four main divisions: asset generation and management (AGM), which is mostly its student-loan book but also its investment branch; loan servicing and systems (Nelnet diversified services, or NDS), which offers various services related to loan origination and technology; education-technology services and payment processing (Nelnet business services, or NBS), which offers a wide array of services such as payment solutions and management solutions for educational institutions; and Nelnet bank (Nelnet financial service, or NFS). It also has an "other" segment that includes Allo, its communications service that serves Nebraska and Colorado, and a cyber fusion center, which focuses on cybersecurity. The company makes money through interest income in the AGM segment and Nelnet bank and fee-based revenue through the other segments.
The company is leaning into fintech (financial technology), using technology to power its interconnected systems and provide an enhanced customer experience. The bank is a continuum of the company's services, providing digital-banking services and offering solutions such as student-debt consolidation.
How is Nelnet doing?
The $20 billion in student loans on Nelnet's books is guaranteed by the federal government, so it's really just sitting there making money for the company. Nelnet reported $83.1 million in net interest income from the AGM segment in the third quarter, versus $80.2 million in the same quarter a year earlier.
As of the end of the third quarter, Nelnet was servicing $514 billion of government-owned student debt for more than 15.8 million borrowers. Revenue for the loan-servicing segment (NDS) was $112 million, a slight decrease year over year, and the segment posted a net loss related to the pandemic. Revenue from the NBS segment increased 15% year over year to $85.3 million. Nelnet bank, which was launched in 2020, had a $192 million loan portfolio. Earnings per share in the third quarter were $1.38, down year over year as the company dealt with coronavirus-related issues, such as debt deferment. The company obviously has a vast market and varied growth pathways, and it's adding services, such as the relatively new Nelnet bank.
Investors loved Nelnet last year, but it's fallen a bit so far in 2022. Even at a price of $95, the shares trade at only 7.5 times trailing 12-month earnings, which is cheap even as far as financial-services stocks go. Its three-year share price gains are roughly on par with the S&P 500:
The company also pays a dividend, which yields a below-average 0.94%, though that's not necessarily a reason to avoid the stock. More important for investors is that Nelnet is a strong, growing company that can add great value to a diversified portfolio.
