Although Navient (currently trading at $12.18 per share) has gained 8.9% over the last six months, it has trailed the S&P 500’s 22.9% return during that period. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Navient, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.
Why Do We Think Navient Will Underperform?
We're cautious about Navient. Here are three reasons why NAVI doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years.
Navient’s demand was weak over the last five years as its revenue fell at a 13% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Navient, its EPS declined by 36.8% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.
If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.
Navient currently has $47.18 billion of debt and $2.56 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 18.5×. We think this is dangerous - for a financials business, anything above 3.5× raises red flags.
Final Judgment
We see the value of companies driving economic growth, but in the case of Navient, we’re out. With its shares trailing the market in recent months, the stock trades at 10.2× forward P/E (or $12.18 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. Let us point you toward one of our top digital advertising picks.
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