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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Sallie Mae

December 4th 2009 Sallie Mae
NYSE Symbol: SLM
Industry: Student Loans
Price as of 12/4: $11.42


The publicly traded government agencies have not had a good track record. Both Fannie Mae and Freddie Mac had to be taken into receivership by the government last year wiping out virtually all shareholder equity. Fannie and Freddie's sister, Sallie Mae not only has survived, but seems to be improving and is our featured stock of the week. It certainly is not a conservative investment. The company relies on their loan portfolio which stands at $188 billion to improve along with the economy for the stock and the earnings to move higher. Two years ago things were looking good for Sallie Mae. A private equity firm offered $60 a share to buy out the student loan provider. Unfortunately, the economy started to crumble before the deal could be finalized giving the private equity firm wiggle room to reject their own offer. With the buy out offer pulled, Sallie Mae's stock whithered with the economy. The stock dropped to $3.11 as many anticipated the company would not survive, yet it has. The third quarter earnings gave investors hope that the company would not only survive, but thrive once again.
Back in October, Sallie Mae reported net income on core earnings of $164 million, or 26 cents a share, compared to net income of $117 million, or 19 cents a share, for the same period last year. The results included a $74 million gain on debt repurchases and a $55 million accounting adjustment to reflect slower loan prepayments. The 2009-2010 academic lending season opened with strong growth in federal student loan originations. The company originated $6.9 billion in federal student loans, an increase of 25%. During the quarter, the company originated $893 million in private education loans, a significant but not unexpected decrease from the year-ago quarter's $2.1 billion. The decrease is principally due to tightened underwriting standards and reduced demand caused by increased federal student loan limits. The third-quarter private education loan loss provisions came in at $413 million, net charge-offs were $443 million. Management anticipates loan charge-offs to decline from the current quarter but to remain at historically elevated levels.
Sallie Mae has been making an effort to work with their stronger borrowers. Non-traditional loans are slowly shrinking as a percentage of the company's loan portfolio. The older non-traditional loans make up 13% of Sallie Mae's private credit portfolio, but account for nearly 50% of charge-offs. Managment said the credit of Sallie Mae's newest borrowers was extraordinarily strong. Credit quality is now expected to improve earnings in the subsequent quarters with estimates as high as $1.50 a share for next year.
If Sallie Mae can make $1.50 a share next year, then the stock is very cheap. Currently, the stock is trading for 7.5 times earnings, 1.6 times book value, and 2.2 times sales. The analyst at FBR indicated that the core earnings are both strong enough and sustainable enough to support a higher share price. He reiterated an outperform rating for Sallie Mae with a $15 price target. Sallie Mae and the economy will face many more bumps in the road over the next several years, but for growth investors or aggressive investors Salle Mae may be a good investment if management is correct about their future projections.