Navient currently trades at $12.92 per share and has shown little upside over the past six months, posting a small loss of 3.8%. The stock also fell short of the S&P 500’s 15.5% gain during that period.
Is now the time to buy Navient, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Navient Will Underperform?
We're sitting this one out for now. Here are three reasons why NAVI doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.
Navient’s demand was weak over the last five years as its revenue fell at a 12.1% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Navient, its EPS and revenue declined by 4.1% and 12.1% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Navient’s low margin of safety could leave its stock price susceptible to large downswings.
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 $47.92 billion of debt and $2.59 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 18.7×. We think this is dangerous - for a financials business, anything above 3.5× raises red flags.
Final Judgment
Navient doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 11.4× forward P/E (or $12.92 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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