Nelnet Exceeds Zacks Estimates - Analyst Blog

Nelnet Inc. (NNI) reported third quarter 2010 earnings of $1.23 per share compared with $1.01 per share in the year-ago quarter. Excluding gains on debt repurchases, the company reported earnings of $1.11 per share, compared with 94 cents in the prior-year period. Results were also ahead of the Zacks Consensus Estimate of $1.02.

Quarterly results reflect a decrease in interest expenses (payable on bonds and notes) and benefits of diversification of revenue through fee-based businesses. However, including litigation settlement and restructuring charges and certain other items, the company reported a net loss of $0.4 million or 1 cent per share on a GAAP basis, compared with a net income of $46.4 million or 93 cents per share in the prior-year period.

Nelnet incurred a pre-tax charge of $55.0 million or 70 cents per share after tax in the reported quarter in connection with the settlement agreement of the qui tam litigation brought by Jon H. Oberg.

Nelnet reported a net interest income of $92.2 million, up 33% from $69.2 million reported in the year-ago period. Interest payable on bonds and notes decreased to $68.2 million from $76.0 million reported in the year-ago quarter.

Nelnet's core student loan spread decreased 13 basis points sequentially but increased 14 basis points year over year to 1.41%. The sequential decrease reflects the widening between the three-month financial commercial paper rate and three-month LIBOR indices. Provisions for loan losses were down 27% to $5.5 million from $7.5 million reported in the year-ago quarter.

Nelnet is focused on increasing its earnings through diversification. Fee-based revenue from its payment processing and enrollment services businesses increased 17% from the prior-year period to $51 million. However, excluding litigation settlement charges of $55 million, operating expenses were $105.3 million, up 14% from $92.7 million in the prior-year quarter.

Nelnet commenced servicing federally owned student loans for the Department of Education (DOE) in September 2009. The company has experienced an increase in loans servicing and reported a growth in revenues from the servicing contract.

As of September 30, 2010, the company was servicing $21.8 billion of loans for 2.5 million borrowers on behalf of the DOE. Revenue from the servicing contract increased to $8.7 million compared with $6.1 million reported in the prior quarter. As of October 31, 2010, the company was servicing $24.9 billion of loans for 2.6 million borrowers.

Nelnet's net student loan assets were $24.4 billion as of September 30, 2010, excluding $2.1 billion of federal student loans classified as held for sale. However, during October 2010, the company sold the loans that had been held for sale. This sale generated a pre-tax gain of $33.8 million that will be reported in the fourth quarter results. The company had generated a pre-tax gain of $36.6 million for loans sold to DOE in 2009. This included a gain of $9.7 million and $26.9 million in the third and fourth quarters, respectively.

Under the company's stock repurchase program, Nelnet bought back nearly 1.2 million shares of Class A common stock for $26.6 million or an average price of $22.47.

The company also declared a fourth-quarter cash dividend of 49 cents per share on its outstanding shares of both Class A and Class B common stock. This included a quarterly dividend of 7 cents per share plus 42 cents per share that represented the dividends for each of the six quarters in 2008 and 2009, a period during which the company had suspended dividend payments to preserve capital. Nelnet expects to pay a quarterly dividend of 7 cents per share in the upcoming periods as well.

Last month, another student lender, SLM Corp. (SLM), commonly known as Sallie Mae, reported third quarter core earnings of $189 million or 35 cents per share, ahead of the Zacks Consensus Estimate of 27 cents. The results compare favorably with the prior-year quarter's core earnings of $164 million or 26 cents per share. The better-than-expected results were primarily driven by higher interest income on its student loans.

Nelnet is experiencing an increase in profitability from its student lending business and is reaping the positives of the efforts to diversify in recent years. The company continues to shift to a more fee-based business model and is currently servicing the DOE's Direct Lending Program.

The student loan reform act that restricted private lenders such as Nelnet and Sallie Mae from making new federal student loans after June 30 is a concern. While Nelnet is expected to strategically expand its fee-based business, the transition from its traditional role of a lender to a provider of fee-based services will take some time.

Nelnet shares retain a Zacks #3 Rank, which translates into a short-term Hold recommendation.