Our base case scenario of short, intermediate, and long term interest rates of 4.00% to 6.00% through 2008 would translate into fair value for SLM of an estimated $30 a share, a price reachable by 2008. That even takes into account that consensus estimates are reasonably close to the mark (i.e. low double-digit earnings growth, and a deterioration in the ROE to the mid to high twenties by 2009).
The "optionality" is with the medium term probability of the SLM's ROE beginning a long-term slide to the low twenties, a not unreasonable outcome since market forces should chip away at these excess returns.
In a market where financial leverage is likely to be penalized, the valuation should contract accordingly. That could translate into underperformance of at least 1000 to 1500 basis points over two to three years (versus the consumer finance sector).
SLM 1-yr chart: