What a brutal six months it’s been for Navient. The stock has dropped 36.8% and now trades at a new 52-week low of $8.62, rattling many shareholders. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Navient, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Navient Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid NAVI and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.
Over the last five years, Navient’s demand was weak and its revenue declined by 19.2% 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 16.1% and 19.2% 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 $45.79 billion of debt and $2.40 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 18.8×. 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. After the recent drawdown, the stock trades at 12.4× forward P/E (or $8.62 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.
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