Navient has been treading water for the past six months, recording a small return of 5% while holding steady at $9.36. The stock also fell short of the S&P 500’s 10.5% gain during that period.
Is there a buying opportunity in Navient, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Navient Will Underperform?
We don’t have much confidence in Navient. Here are three reasons why there are better opportunities than NAVI, plus one 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 experience short-term success, but top-performing ones enjoy sustained growth for years.
Over the last five years, Navient’s demand was weak and its revenue declined by 21.6% per year. This was below our standards 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 15.7% and 21.6% 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 $44.43 billion of debt and $2.40 billion of shareholders’ equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 18.9×. We think this is dangerous - for a financials business, anything above 3.5× raises red flags.
Final Judgment
Navient falls short of our quality standards. With its shares underperforming the market lately, the stock trades at 11.4× forward P/E (or $9.36 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of Navient
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