Own Sallie Mae for the Long Term Despite Revenue Miss

SLM Corporation (SLM)  shares, at around $7.30, are trading some 31% below the consensus price target, making this financial services company look significantly undervalued. Although a third-quarter revenue miss, reported late Wednesday, leaves little to be desired, owning SLM now is could pay off for long-term investors.

The company, known as Sallie Mae, reported earnings of 12 cents per share, which beat analysts' estimates by 1 cent. The student loan company benefited from a rise in net interest income as well as non interest income and an increase in private education loan originations.

During the quarter, Sallie Mae's net interest margin expanded 22 basis points year over year to 5.6%. Net interest margin is a measure of the difference between the interest income Sallie Mae generated and the amount of interest paid out. Non-interest income was also strong, rising about $10 million from last year to $23 million.

These gains helped Sallie Mae offset a 6% rise in expenses and a rise in provisions. The company said the higher expenses, which grew to $100 million, were mainly tied to increased compensation and benefits expenses and higher FDIC assessment fees. Third-quarter revenue grew 27% year over year to $223.3 million, but missed Street forecast by about $3 million.

Sallie Mae stock closed Wednesday at $7.25. The shares have risen 12% year to date, besting the 5% rise in the S&P 500 (SPX) . The company is projected to earn 67 cents per share in fiscal 2017, which would mark a year-over-year earnings growth of 28%. Not only would that translate to almost six times the growth rate of the S&P 500 index, Sallie Mae stock is priced at just eleven times those estimates, which is six points below the S&P 500 index.

Assuming the stock was priced on par with the S&P 500 index, Sallie Mae shares would trade today at around $11.50, or 56% above current levels. This explains why, despite the stock's outperformance, Sallie Mae still has a consensus buy rating and an average analyst 12-month price target $9.56, suggesting 32% rise from current levels.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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