Is Sallie Mae (SLM) Likely to Miss Earnings This Season?

Sallie Mae SLM is scheduled to report its third-quarter 2014 results on Wednesday, Oct 22, after market close.

Following the separation of SLM Corporation into two distinct publicly-traded entities on Apr 30, 2014, Sallie Mae started operating independently as a consumer-banking focused company, catering to private education loans, and providing saving and insurance products for higher education to students and families.

A Look Back into the Q2 Results

Post split, the new Sallie Mae delivered a positive earnings surprise in its standalone financials for second-quarter 2014. Core earnings of 10 cents per share, marginally outpaced the Zacks Consensus Estimate of 9 cents.

Better-than-expected results were aided by increased net interest income, partially offset by higher expenses. A decent capital position and increased balance in the private education loan portfolio were the positives.

Notably, Sallie Mae's second-quarter 2014 results included the impact of the split. The company stated that the transaction was treated as a reverse-spin for accounting purposes. Consequently, Sallie Mae's historical financial statements and details of the education loan portfolio prior to Apr 30, 2014 include only those operations, assets, liabilities and equity of the consumer banking business.

What Management Expects?

In the second quarter earnings presentation, Sallie Mae stated that for full-year 2014, it expects core earnings per share in the range of 41 cents – 43 cents, while operating expenses are expected to be $312 million, including restructuring expenses of $32 million.

Private education loan originations were projected to be $4 billion for the year. For second-half 2014, the company expects private education loan sales of $1.2 billion and provision for private education loan losses of around $60 million.

While nothing was specifically referred for the third quarter, we believe there will be some reflections of this guidance in the upcoming third-quarter results.  

Activities of Sallie Mae during the quarter were inadequate to win analysts' confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 17 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Sallie Mae is likely to beat the Zacks Consensus Estimate in the upcoming release. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Negative Zacks ESP:  The Earnings ESP for Sallie Mae is -5.88%. This is because the Most Accurate estimate of 16 cents stands below the Zacks Consensus Estimate of 17 cents per share.