Nelnet Downgraded to Neutral - Analyst Blog

We are downgrading our recommendation on Nelnet Inc. (NNI) to Neutral from Outperform.

Although the student loan reform law has barred companies such as Nelnet and SLM Corp. (SLM), commonly known as Sallie Mae, from originating federal student loans since July, in recent years, Nelnet has expanded in areas that are independent of the federal program. Increasing revenues from its fee-based business and servicing of loans for the Education department along with restructuring initiatives should support Nelnet's earnings. The company's floor income would also benefit from an expected low interest rate environment. However, we believe that the positives have already been factored in the current price.

Revenue earned from Nelnet's fee-based operating segments has also grown 19% in the first nine months of 2010. Fee-based segments generated 66.3% of the total revenue in 2009. We believe this diversification should provide support to Nelnet's revenue streams, going forward.

Though Nelnet's capital position is solid, we believe that concerns over implementation of the recent financial reform act and a challenging economic environment remain.

Also, expenses at Nelnet are expected to increase with the rise in the volume of loan servicing. Operating expenses in the third quarter of 2010 were up 14% year over year. Number of employees has increased in the Student Loan and Guaranty Servicing operating segment due to the significant rise in servicing loan volume as a result of the government servicing contract, which led to a shoot up in expenses.

This justifies our current Neutral recommendation on the shares of Nelnet. Additionally, Nelnet shares are carrying a Zacks #3 Rank, which translates into a short-term “Hold” recommendation.

 
NELNET INC CL-A (NNI): Free Stock Analysis Report
 
SLM CORP (SLM): Free Stock Analysis Report
 
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