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This Value Stock Is Up 41% in 2021. Is It a Buy?

This Value Stock Is Up 41% in 2021. Is It a Buy?

This story originally appeared on The Motley Fool.

The coronavirus pandemic swept up the world in 2020, upending life as we know it. One area feeling the pain was the college system. Last spring, students finished out the semester remotely across the nation. The change to remote learning also affected high school students’ decision to go to college, according to the National Student Clearinghouse Research Center, which reports college enrollment decreased 3% for the 2020-2021 academic year.

Meanwhile, the congressional relief packages included loan forbearance on student loans — and loan provider Navient (NASDAQ:NAVI) got caught in the middle of the storm. The company provided payment relief to its borrowers while also originating fewer private loans, hurting the company’s stock price. The result? The company is trading at a deep discount, with a price-to-earnings ratio around 6.5, even with the stock up 41% this year through Monday’s close. As conditions improve in 2021, is Navient a good value stock to include in your portfolio?

The bad

Navient had forbearance rates of 28.5% on federal loan borrowers and 14.7% on its private loan borrowers during the peak of the pandemic in last year’s second quarter. This, combined with fewer students enrolling at colleges for the 2020-2021 academic year, made 2020 a tough one for the lender. With college enrollment down 4%, Navient made 7% fewer private loans compared to the year before, totaling $4.6 billion. Its total educational loan portfolio dropped $6.5 billion, to $84 billion on the year.

More loans in forbearance meant a drastic drop in interest income. But net interest income actually rose during the year. How could that be? It’s because interest expense dropped even more, with the company citing better funding costs and a low-interest-rate environment — favoring Navient. Net interest income ended up 4% from the year before.

The company isn’t just a student loan lender. It also provides business services to 500 governmental and healthcare clients, which include services like expense management, risk management, business office support, and consulting. Last year Navient put its team to work helping state governments process unemployment benefits and providing contact tracing services. The result of these new income sources helped its business processing segment grow revenue by 18% during the year, to $304 million.

Looking forward

There are signs things are turning around for the lender. For one, forbearance rates on loans dropped to 13.8% on federal loans and 3.9% on private loans. It has seen its delinquency rate drop on the year, to 2.6% on private loans and 9.2% on federal loans, both down from the year before. These both dropped due to an increase in forbearances granted during the year.

The company saw its charge-off rate fall to 0.88% on its private loans from 1.67% in 2019. However, this is yet another result of loan forbearances. As the economy reopens, loans will go from forbearance status into repayment, and the company will face higher charge-offs on some of those loans. For this reason, management expects charge-offs on its private loans to rise to the 1.5% to 2% range, in line with historical norms.

As forbearances go down and charge-offs increase, Navient expects to see its net interest margin in its private lending segment decrease to between 2.7% and 2.8%, down from 3.2% in 2020. The company also expects its core earnings per share to range from $3.10 to $3.25, a decrease from its 2020 core EPS of $3.40. However, Navient expects to see improvements in lending in 2021, with private loan originations expected to be $5.5 billion, a nearly 20% increase from the year before.

Current valuation leaves room for upside

Navient is in deep value stock territory, with a price-to-earnings ratio of 6.5 and a price-to-book ratio just over 1 at Monday’s prices. Both of these metrics are on the lower end historically for Navient. With the stock trading at a discount, now could be a good time for the company to aggressively buy back shares.

The company is also a solid income stock, with a dividend yield of 4.7%. Navient has committed to returning capital to shareholders in the form of both dividends and share repurchases. In 2020, the company spent $523 million on dividends and share repurchases, and it plans to spend another $400 million in 2021. This, coupled with improving economic conditions and increasing loan originations, should serve as a tailwind for the company, making Navient a solid value stock worth consideration for your portfolio.

Should you invest $1,000 in Navient Corporation right now?

Before you consider Navient Corporation, you’ll want to hear this.

Investing legends and Motley Fool Co-founders David and Tom Gardner just revealed what they believe are the 10 best stocks for investors to buy right now… and Navient Corporation wasn’t one of them.

The online investing service they’ve run for nearly two decades, Motley Fool Stock Advisor, has beaten the stock market by over 4X.* And right now, they think there are 10 stocks that are better buys.

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