Thursday, April 17, 2008

Sallie Mae I? No, You May Not.

I noticed SLM popped 9% this morning after their earnings release and conference call. You've got to be kidding me.

The student loan market is in disarray.

  • Cuts made to the federally guaranteed loan program have hurt.
  • The credit crisis has resulted in less funding being made available to the student loan companies.
  • The lack of liquidity in the market has made it difficult for lenders to package and sell (securitize) their loans in the asset-backed market. The securitizations that they can sell are being done at very high spreads (they're very expensive to the lender). As a result, new loans are being made at a loss.
  • Fifty-seven lenders have dropped out of the program, and 19 lenders have suspended private student loans.
With that, let's take a quick look at Sallie Mae's (SLM) press release from last night. To their credit, in the first paragraph they state that, "Under current conditions, however, loans can only be made at an economic loss. Reflecting this environment, the company is assessing how best to balance its resources and its mission to provide access for higher education."

In the next 4 paragraphs they go on to discuss "core earnings" and explain how according to "core earnings" they registered a nice $0.48 in EPS for the quarter. Finally, in the 8th paragraph, they get around to discussing GAAP earnings. Turns out they managed to LOSE $0.28 share according to GAAP.

Basically, they tell us that we should ignore the markdown they took on their derivatives position and forget about their intangible assets. Leave out the bad stuff and things don't look so bad.

Some other points. The loss provision they took didn't look overly conservative given the environment. The company admitted that they can't write new business at a profit. The company isn't sure whether any legislation coming out of Washington would help or hurt them. The company's reliance on forbearance continues to increase. Their access to reasonably priced capital continues to deteriorate. Equity is a whopping 2% (that's sarcasm) of assets. Even "core earnings" are expected to be at the low end of their range (I'd be surprised if they even hit that.).

With all that, the stock is up 9%, north of $17.50. Apparently, the market feared something worse than what the company reported, and this is some sort of relief rally.

Given the risks and uncertainties surrounding this company and its business, this would not be a good investment for your kid's education fund given what we know today.