Not all good investments are exciting, disruptive, world-changing ventures. Some of the best investments are well-run businesses that make life a little easier for their customers and increase sales along the way. student loan processor Nelnet (NYSE: NNI) falls into the second category. It’s one of Wall Street’s best-kept secrets, with a market capitalization of just $3.6 billion, even though it’s gained 33% in the past year. Stocks are still trading just below $100, and if you have that amount available to invest after paying your bills and saving for an emergency fund, you should consider buying a stock.
More than student loans
Nelnet is known (if known at all) for its massive student loan book, though it operates several businesses that together make it a financial services juggernaut. It is not creating new loans at this point, although it carries nearly $20 billion in loans on its balance sheet and expects $2.2 billion in loan repayments over the next few years. . It therefore relies on its other businesses to offer it new avenues for growth.
Nelnet is more like a conglomerate than a single company, running several different businesses, some of which feed off each other and some that are separate. It operates four main divisions: Asset Generation and Management (AGM), which is primarily its student loan portfolio but also its investment arm; Lending Service and Systems (Nelnet Diversified Services, or NDS), which offers various services related to loan origination and technology; education technology services and payment processing (Nelnet Business Services, or NBS), which offers a wide range of services such as payment solutions and management solutions for educational institutions; and Nelnet Bank (Nelnet Financial Service, or NFS). It also has an “other” segment that includes Allo, its communications service that serves Nebraska and Colorado, and a cyberfusion center, which focuses on cybersecurity. The company earns money through interest income in the AGM segment and Nelnet bank and fee-based income in the other segments.
The company is leaning into fintech (financial technology), using technology to power its interconnected systems and deliver an enhanced customer experience. The bank is a continuum of the company’s services, providing digital banking services and offering solutions such as student debt consolidation.
How is Nelnet?
The $20 billion in student loans on Nelnet’s books are federally guaranteed, so it’s just sitting there making money for the company. Nelnet recorded $83.1 million in net interest income from the AGM segment in the third quarter, compared with $80.2 million in the same quarter a year earlier.
At the end of the third quarter, Nelnet was servicing $514 billion in government-held student debt for more than 15.8 million borrowers. Loan servicing (NDS) segment revenue was $112 million, down slightly year-over-year, and the segment reported a pandemic-related net loss. NBS segment revenue increased 15% year-over-year to $85.3 million. Nelnet Bank, which launched in 2020, had a loan portfolio of $192 million. Earnings per share in the third quarter were $1.38, down year-over-year as the company grapples with coronavirus-related issues, such as debt carryover. The company obviously has a large market and varied growth paths, and it adds services, such as the relatively new Nelnet bank.
Investors loved Nelnet last year, but it’s been down a bit so far in 2022. Even at a price of $95, the stock is trading at just 7.5 times trailing 12-month earnings, which is cheap even when it comes to financial services stocks. Its three-year share price gains are roughly on par with the S&P 500:
The company also pays a dividend, which yields a lower-than-average rate of 0.94%, though that’s not necessarily a reason to avoid the stock. More importantly for investors, Nelnet is a solid and growing company that can add great value to a diversified portfolio.
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