Navient: A Misunderstood Business (NASDAQ:NAVI)

<iframe src=”//″ width=”250″ height=”250″ scrolling=”no” border=”0″ marginwidth=”0″ style=”border:none;” frameborder=”0″></iframe>

Thesis Summary

Navient Corporation (NAVI) primarily provides loan management services for student loans. Its revenues and the balance sheet have been shrinking since 2015, and the stock now trades at around half the price of its all-time highs. We see this as an excellent value investing opportunity. Despite falling revenues, Navient has been able to increase its profitability, as evidenced by the increases in EPS. As long as the financial ratios can be maintained, the company can easily sustain the dividend and pay off its obligations, even under the assumption of falling revenues. Therefore, we rate NAVI a strong BUY.

Company Overview

The Navient Corporation is a loan management company, primarily servicing and collecting student and healthcare loans, but the company operates in four different segments; Federal Education Loans, Consumer Lending, Business Processing, and Other. To understand the path that Navient has been on and where it is going, we must zoom out and see how revenues and income have been moving over the last few years:

Source: 10-K

Above, we can see a breakdown of select operating data going back to 2015. This was an important year because it represented a peak in both EPS and share price. The company’s revenues have for the most part been falling since then. This is due primarily to the reduction in Education loans, specifically those under the FFELP (Federal Family Education Loan Program). The company’s asset base has decreased considerably since 2015. Having said this, the fall in revenues has been “offset” by lower operating costs and sustained profitability, allowing Navient to achieve similar EPS in 2019 as in 2015, despite the setbacks.

2019 showed a promising outlook, especially given the increase in consumer lending, but the events of 2020 have meant that revenues are once again down, around 30% compared to the first two quarters of 2019. Once again though, Navient is “weathering the storm” thanks to reduced delinquency rates and improved profitability metrics, as well as by delivering value to investors through share buybacks and dividends.

Source: Investor Presentation

As we can see, core earnings return has improved above expectations, while net interest margins for both consumer and federal loans have increased significantly. Lastly, it is worth talking about the financial solidity of the company, so let’s look at the balance sheet:

Source: 10-Q

The company currently carries around $88 billion in long-term debt, mostly funded by senior notes. Against this, we have just over $91 billion in assets. For investors, it is concerning that the company’s D/E ratio is at its highest ever, just over 37. The biggest worry here is that the company will not be able to meet its financing needs, especially if the current trend of falling revenues and fewer assets continues.

Financial Metrics

A company like Navient relies heavily on outside credit, and as such, investors and financiers are always looking at financial metrics for the company. Even small changes in margins and delinquency rates can have big effects on the cash flow, which, in turn, affects their ability to repay debt. Worsening metrics could lead to a lower credit rating, which, in turn, would significantly hamper the valuation of the company. Let’s look at how these metrics have evolved in the last few months in the two most significant segments:

Source: Investor Presentation

The Federal Education Loans segment, which represents the biggest part of NAVI’s portfolio, has improved significantly on most accounts. Net interest margin is up by 32%, while delinquencies are down significantly. Of course, this might have to do with the increased rate of forbearance. Expenses are down by 21%, and net income is higher than a year ago.

Source: Investor Presentation

Looking at the Consumer Lending Segment, we see similar positive results. NIM and charge offs are both down by 38%, and delinquency rates have decreased by 60%. It is also worth noting that average private education loans have increased since this time last year, as has net income.

Overall, the company has been improving its profitability metrics for the last couple of years. The net income margin has been rising steadily since the second quarter of 2018, and this makes us confident that the company can meet its obligations.

Source: Investor Presentation

Navient claims to pursue a “conservative” approach to debt and has reduced its debt load by around 10% in the last year. Combined, Navient’s education portfolios are projected to generate 9.4 billion in cash flows, which is more than enough to cover the debt burden. Furthermore, we expect Navient could recover its previous BB rating in the near term, despite the recent downgrade to BB- by Fitch.

Future Outlook

NAVI’s future outlook will be unavoidably tied to that of the average American consumer. A strong economic recovery will aid NAVI in growing its portfolio and reducing defaults. For the most part, we remain bullish on the medium-term outlook given the most recent advancements in finding a COVID-19 vaccine and lower than expected unemployment rate.


Trading Economics projects that unemployment should trend around 6.5% in 2021 and 4.5% in 2022. At the same time, GDP is projected to grow around 1.7% in 2021 and 1.9% in 2022.

This is relatively good news for Navient, especially as it relates to its portfolio of consumer loans. In 2019, Navient increased its Private Education Loans by 75% YoY, and we expect this trend to continue over the mid term. We also see the potential for further growth in the healthcare sector and business service sector, where the company already has a presence following the acquisition of Xtend. More recently, the company acquired Earnest, which will also aid it in positioning itself in the fast-growing fintech space.

Of course, much of what happens in the next year will depend on the results of the upcoming elections. A Trump win, combined with further stimulus would be a tailwind for NAVI, and the stock could certainly jump on the news, which also gives us the opportunity of locking in profits in a short amount of time.

On a final note, it is worth mentioning that the company recently updated its EPS forecast for 2020 at around $2.95, significantly higher than analyst consensus. Navient has a long track record of beating EPS estimates (11 out of the last 12 quarters), giving us reason to trust their forecast.


We have estimated a return on investment in Navient’s common stock, using our valuation method.

The valuation method is based on our estimates of potential unlevered free cash flow to common shareholders. To do this, we analyze some key ratios regarding investment, revenue, and operating expenses.

As an indicator of investment levels that drive revenue, we look at the level of long-term assets for operations and use the recent trend for their relation with previous and future revenues to estimate the levels of investment and revenue in the future. We do the same for operating expenses and working capital, relative to revenue. Note that we may include some items in the operating expenses which are not considered operating in the official income statement, but we think are a regular part of the company’s activity.

We also use recent trends in ratios to estimate the rest of the items, which usually include financial income or expenses (based on the net level of debt, as per our interpretation of the balance sheet), minority interest (based on the level of net income), dividends to preferred equity (based on the level of preferred equity), and the level of net debt (based on the recent trend in leverage). For Navient, we have chosen not to separate operational and financial concepts since they operate in finance, so all assets and liabilities are considered operational.

We may add manual changes to some items or ratios based on qualitative analysis and information from the latest quarterly reports. For Navient, we see that our model projects a similar fall in revenue to that of consensus estimates by 2022 (near 1bn of revenue), so we did not make any changes to that. The estimated 5-year CAGR for revenue is -7.84%.

The final valuation is a sum of the discounted value of future unlevered free cash flow to common shareholders, minus the current level of debt (none in this case). To evaluate cash flow potential, we assume a net investment of 0 in the fifth year of the forecast, which we use to calculate terminal value. In this case, since the revenue, earnings, and cash flow are projected to fall and to err on the pessimistic side, we assumed cash flows will continue to fall perpetually by the same rate as the revenue in the fifth year of the forecast (-4.6%).

With Navient, as you can see in the forecast and valuation summary below, we get an expected return of 38% for common stock at the current price of $9.05 (October 26). Items are in millions of USD except ratios and per-share items.

Source: Author’s work


Navient does face significant risks in three main areas; political, legal, and structural. Politically, it is believed by most investors that a blue win would hamper the prospects of Navient. Democrats could enact legislation that directly affects student loans and healthcare. If the government were to take over these areas or issue some kind of debt relief, Navi could be left “holding the bag”. Having said this, polls and analysts may be understating the likeliness of a Trump win, which is leading to a high discount on NAVI’s stock. Evidence of this can be found in the recent numbers to come out regarding voter registration in key states such as Florida and Arizona, which show that Republicans are outnumbering Democrats.

Legally, Navient is still involved in six different lawsuits that claim the company may have misinformed borrowers to its advantage. Nonetheless, we don’t expect litigation costs to have a significant effect on income.

Lastly, Navient would be in deep trouble if the economy fails to recover. High unemployment leading to higher delinquencies would reduce income margin and could even force rating agencies to downgrade Navient’s debt status. The company’s reliance on capital markets is certainly a weak point to watch out for.


We believe Navient to be a misunderstood company. Investors see falling revenues as a bad sign, but a company like NAVI can still return value to investors even with negative growth. The key lies in the fact that it has been able to continually increase its profitability. Given our cash flow projections, we believe NAVI is a sound investment, the dividend is more than covered and there is little risk of insolvency. While political and structural changes remain a risk factor, the reward far outweighs the risk in this scenario.

Macro Trading Factory is a new service focused on macro views, market outlook, and asset-allocation.

We demonstrate portfolio and risk management, in a simple and relaxed manner.

Our model-portfolio is:

  • well-diversified, containing up to 25 leading ETFs and CEFs.

  • managed by a team of professionals, led by TMT.

  • aiming to outperform the SPY on a risk-adjusted basis.

  • allowing you to keep-up with your daily-routine.

MTF is your perfect solution if you’re looking for an ongoing, professional, trusted, affordable guidance, especially with little time on their hands.

Macro Trading Factory = An Upward Trajectory!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Be the first to comment

Leave a Reply

Your email address will not be published.


+ 2 = 6