Kayode Omotosho
2 min read
Sallie Mae’s stock price has taken a beating over the past six months, shedding 20.6% of its value and falling to $18.33 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Sallie Mae, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why do we think Sallie Mae will underperform?
Even with the cheaper entry price, we don’t have much confidence in Sallie Mae. Here are two reasons why SLM doesn’t excite us, plus one stock we’d rather own.
1. Revenue spiraling downwards
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.
Over the last five years, Sallie Mae’s demand was weak and its revenue declined by 1.3% per year. This wasn’t a great result and is a sign of poor business quality.
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.
Sallie Mae declined their EPS by 5.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final judgment
Sallie Mae doesn’t pass our quality test. Following the recent decline, the stock trades at 6.7× forward P/E (or $18.33 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at the most entrenched endpoint security platform on the market.
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