Performant Financial's (PFMT) EPS estimates should be 41% lower resulting in an intrinsic value 48% lower than the current stock price ($9.17). This is based on Sallie Mae (SLM)'s comments during its earnings conference call on January 17th.
PFMT, which IPOed in August 2012, helps identify and recover delinquent or defaulted assets and improper payments for both government and private clients in a broad range of markets. Approximately 63% of its revenue is from the student lending market where its customers are the Department of Education and Guarantee Agencies. Guarantee Agencies are non-profit entities that provide insurance against defaulted students loans under the now eliminated Federal Family Education Loan Program (FFELP was suspended by the Health Care and Education Reconciliation Act of 2010). The Guarantee Agencies are in turn re-insured by the Federal Government and currently are in run-off mode with their existing FFELP loans.
The compromise budget signed by the President in December 2013 included a clause that lowered the fees paid to the Guarantee Agencies for rehabilitating student loans under the FFELP effective July 2014. While this information was known in December 2013, Sallie Mae, which reported earnings on January 17, 2014, provided specific numbers on the potential trickle down impact of the lowered fees paid to the Guarantee Agencies. SLM said that the annualized impact of the fee reduction will be $120 million, which per a review of their annual report and per a discussion with the investor relations person at SLM is "significantly more than 28.5%" of the loan rehabilitation fees they receive from the Guarantee Agencies.
As detailed below, extrapolating the estimate that SLM has provided to PFMT results in a 41% reduction to PFMT's EPS and to PMFT's intrinsic value.
- Consensus Estimated 2014 Revenue (source: Bloomberg) = 249 million
- Estimated revenue from student lending (source: 10-Q) = 63% or $157 million
- Estimated revenue from Guarantee Agencies (source: 10-Q) = 60% of total student lending revenue or $94 million
- Estimated revenue from Guarantee Agencies related to rehabilitation fees (source: internal estimate) = 80% or $75 million
- Estimated reduction in revenue from Guarantee Agencies related to rehabilitation fees (source: extrapolation from SLM call and IR discussion) = 35% or $26 million
- Estimated marginal (incremental) profit on lost revenue (source: internal estimate) = 75% or $20 million
- Revised EPS (source: not applicable) = $0.43 (41% lower than current estimates of $0.73)
Intrinsic value estimate = $4.73 (48% lower than the current price) (valuation is based on a 11x PE to account for the disruption to the core student lending business, the contract renewal risks of the Student Loan re-bidding process and the Medicare Recovery Audit Contractor re-bidding process, which accounts for approximately 26% of its revenues).
- PFMT IPO prospectus (1.usa.gov/1cRcEUV)
- SLM conference call webcast (bit.ly/1ikbr0z) - management comments on the impact of the recent budget compromise on its rehabilitation fee revenue
- Budget compromise details (fxn.ws/1f3OBXF) - specifies that the fees to be paid to Guarantee Agencies will be reduced
Disclosure: I was long PFMT till Friday and currently have a short position. I may change my position without updating this article.
Disclosure: I am short PFMT, .