Since the start of 2021, student lender Navient (NAVI +5.85%) has seen its stock run up an eye-popping 69%, crushing the S&P 500's total return of 15% during the same time.
Navient is a stock that looks quite cheap, trading at a price-to-earnings ratio (P/E) just under 4. Given its big run-up along with its cheap price, value investors might be tempted to jump on it. However, I'm skeptical of the company and believe value investors are better off looking elsewhere. Here's why.
Navigating uncertainty
Navient's student loan business has faced uncertainty in recent years. Earlier this month the lender settled a decade-old lawsuit brought against it by 38 states. Those states accused the lender of predatory behavior, including steering customers to costly repayment plans rather than more affordable income-based repayment plans. Navient ultimately settled the lawsuit for $1.85 billion, which included canceling $1.7 billion in loans to 66,000 borrowers. In a statement, it denied breaking any laws or causing harm to borrowers, saying the matter was "based on unfounded claims."
It was already feeling pain from the pandemic as universities shifted toward remote-learning options, causing enrollments for the 2020-2021 school year to decline nearly 3%. That and student loan repayments, interest, and collections have been on pause since the pandemic began. The Biden administration recently extended this pause on loans through May 1, 2022, after many experts believed it would expire on Jan. 31.
On top of that, there have been calls to cancel student loan debt, which is likely why Navient is getting federal loans off its books. In September 2021, it sold its loan servicing businesses related to student loans owned by the U.S. Department of Education to Maximus. Federal education loans had accounted for 12% of Navient's net interest income plus other income.
Image source: Getty Images.
Since 2014, the company has seen revenue declining steadily, from $3 billion in 2014 down to $1.9 billion in the trailing 12 months through Sept. 30, 2021, representing a drop of 38%. During this same time, net income has gone from $1.1 billion in 2014 down to $913 million in the trailing 12 months. While net income had improved from 2020, when it was only $412 million, it's still not clear what the company's future has in store.
The reason this stock was up big in the past year
Navient's stock price has stayed up because of the company's massive share repurchase program. In October 2019, the company approved a $1 billion multiyear plan to buy back stock. In 2020, it repurchased 30.6 million shares totaling $400 million. Through nine months of 2021, the company repurchased another 26.9 million shares totaling $450 million.
If a company buys back shares when its stock is cheap, that can be a good thing. But Navient is buying back shares without improving its fundamentals -- things like revenue and net income -- which makes me skeptical of the company's long-term prospects. From October 2019 through the end of the third quarter in 2021, Navient's share count went from 225 million down to 165 million as a result of share buybacks, a 26% reduction in total shares outstanding.
When there are fewer shares available, each represents a larger piece of the underlying business. As a result, metrics like revenue per share and earnings per share (EPS) can look like they are growing, when the fact is they are being propped up by a shrinking share count, which you can see from the chart below.
Image source: ycharts.
Navient is trading at a cheap price tag, but it's cheap for a reason. The business hasn't seen any growth in years. This is one situation where the Warren Buffett adage applies: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." If you're on the lookout for value stocks, there are much better options for you.
