NEW YORK—Recent moves by the federal government to bolster the student loan market will likely help Sallie Mae remain profitable and active in the industry, and may boost market share, an analyst said Tuesday while upgrading the company.
Lehman Brothers raised its rating on the Reston, Va., student loan lender to "Overweight" from "Equal weight" and its price target to $30 from $27. The new target implies Lehman expects the stock to rise about 21 percent over Monday's $22.27 close.
On Friday the U.S. Federal Reserve moved to inject more cash into the student loan market. That effort, combined with Congress' decision to give the Education Department temporary authority to buy loans from student lenders to ensure their access to capital, helps the industry, Lehman said.
"The steps that the government is taking to ensure available funding for students this coming academic year should also enable Sallie Mae and other FFELP lenders to remain profitable and active in the industry and potentially gain considerable market share," Lehman said in a note to clients.
The FFELP, or Federal Family Education Loan Program, allows private sector companies -- such as Sallie Mae -- to market and lend federally guaranteed loans.
The FFELP industry comprises about 80 percent of total government guaranteed funding for students, and the government's federal direct loan program does not have the capacity to originate loans if private lenders pull out, Lehman said.
"With Sallie Mae more efficient than most lenders ... we would expect the funding costs (or premiums) will need to be attractive enough for the average FFELP lender to remain in the business," Lehman said. "Since Sallie Mae has greater operating leverage, we believe the profitability ... should be quite attractive."
Shares of SLM Corp. rose 30 cents to $22.57 in premarket trading Tuesday.
