The Market Is Betting Big on NAVI - What's the Catch?

One of Wall Street's biggest winners of the day is Navient, a credit services company whose shares have climbed 6.8% to a price of $14.94. The stock is rising after the White House announced it was scaling back the scope of its federal loan forgiveness plan. NAVI may have outstripped the S&P 500 index by 7.2% so far today, but it has lagged behind the index by 10.4% over the last year, returning -26.8%.

Navient Corporation provides education loan management and business processing solutions for education, healthcare, and government clients at the federal, state, and local levels in the United States. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.

Navient's trailing 12 month P/E ratio is 3.7, based on its trailing Eps of $4. The company has a forward P/E ratio of 5.0 according to its forward Eps of $3.01 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US financial services companies is 13.34, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The problem with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has extremely high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Navient's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.55. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are under valuing NAVI's growth potential .

To better understand the strength of Navient's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

  • 2021 operating margins: 41.2 %
  • 2020 operating margins: 34.7 %
  • 2019 operating margins: 43.9 %
  • 2018 operating margins: 34.0 %
  • Average operating margins: 41.2 %
  • Average operating margins growth rate: 9.0 %
  • Coefficient of variability (lower numbers indicate less volatility): 12.7 %

Navient's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

  • 2021 free cash flow: $702,000,000.00
  • 2020 free cash flow: $987,000,000.00
  • 2019 free cash flow: $1,019,000,000.00
  • 2018 free cash flow: $1,140,000,000.00
  • Average free cash flow: $702,000,000.00
  • Average free cash flown growth rate: -14.2 %
  • Coefficient of variability (lower numbers indicating more stability): 19.3 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in NAVI have received an annualized dividend yield of 4.6% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Navient's P/B ratio of 0.7 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Financial Services sector was 1.95 as of the second quarter of 2022.

Navient is by most measures undervalued because it has a very low P/E ratio, an exceptionally low P/B ratio, and a steady yet downwards trend of positive cash flows. The stock has mixed growth indicators because of its decent operating margins that exhibit a strong growth rate and a PEG ratio of less than 1. We hope you enjoyed this overview of NAVI's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.