Citi Initiates SLM Corp With A Buy Rating, $8.50 Target

Citi has started coverage of SLM Corp (NASDAQ: SLM), more commonly known as Sallie Mae, with a Buy rating and price target of $8.50, implying an upside of 21.4 percent.

Citi said SLM is the largest originator of private education student loans and has over 50 percent share of originations (about double its nearest competitor) in this important and growing market.

"We believe SLM is a rarity among financial stocks given its strong earnings growth and is not dependent on rising int rates. We see EPS growing 25 percent in ‘16–'18, led by 20+ percent loan growth and expense leverage," analyst Michael Kaye wrote in a note.

In contrast to the federal loan market, the analyst said SLM's private student loans are conservatively underwritten "with avg FICO of 740+ w/ a 90 percent cosign rate."

Kaye noted that comparable legacy SLM charge-offs peaked at 2.7 percent in ‘10 vs. 0.95 percent in Q1.

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Kaye expects 2016 EPS of $0.51 in line with consensus and 2017 EPS of $0.64 ($0.02 below consensus).

"We view private student lending as a niche business within consumer finance with high credit quality as well as solid ROEs (13–15 percent)," the analyst highlighted.

Shares of SLM closed Wednesday's regular trading session at $6.96 and were up 1.65 percent on Thursday at time of writing, trading at $7.07.

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