Compass Point Sees Sallie Mae's (SLM) Green Light for Higher Annual Growth Cap as a Positive - Reiterates Buy
Compass Point maintained a Buy rating on SLM Corp. (NASDAQ: SLM), and cut the price target to $8.00 (from $11.00), following the company's announcement that it has recieved regulatory approval to grow beyond its restrictive 20% annual cap. Compass Point views this announcement, as well as management's expectation of retaining loans on balance sheet, as a clear positive as it removes a significant source of volatility leaving a higher-growth, higher quality earnings stream.
Analyst Michael Tarkan commented, "We reiterate our Buy rating on SLM after the company reported steady 4Q earnings and more importantly, announced that it received regulatory approval to grow beyond its restrictive 20% annual cap. We view this announcement and management's expectation of retaining loans on balance sheet as a clear positive as it removes a significant source of volatility leaving a higher-growth, higher quality earnings stream. In conjunction with the updated guidance, we have pulled loan sales from our model. As a result, we now project core EPS of $0.50 for 2016 (vs. $0.66 previously) and $0.64 for 2017 (vs. $0.80). We have also lowered our price target to $8, from $11, which reflects approximately 30% upside from current levels. Our updated target translates into 12x 2017E EPS and 2x 4Q16 TBV. We view these multiples as conservative given the company's strong growth profile, steady credit, emerging operating leverage, and high barriers to entry in the core private student loan market. Assuming credit continues to hold up, we expect earnings growth to continue to take shares higher over the next few years."
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Shares of SLM Corp. closed at $5.41 yesterday.