Nelnet, Inc. (NNI)

[Prudent Capitalist]

NNI upgraded - New $33 Price Target (Credit Suisse)

Solid 3Q Results; FFELP Cash Flows To Add Value; Upgrading to OP and Raising TP to $33

After 3Q results, we upgrade Nelnet to Outperform and raise our target price from $29 to $33. The increase in our TP is driven by additional value of $3/shr from FFELP portfolio acquisitions and securitizations and $1/shr from 2013-based valuation of fee and servicing businesses. This valuation is supported by more active capital management, as NNI has declared a $1/share special dividend for 4Q. Nelnet posted a solid 3rd quarter and a better FFELP NIM than we had expected. Cash flows for its FFELP portfolio increased $10MM in 3Q to $1.88Bn, despite a shrinking portfolio. NNI indicated that in 4Q, it purchased $1.1Bn of FFELP loans and expects to purchase more in 4Q12. Our cash flow forecast includes loans purchased to date. On fee income, we update our valuation to reflect 2013 earnings estimates and NNI’s increased ED contract share for 2012-13 (30%,
up from 16%), which increases the fee income valuation to $12/shr. Our valuation is supported by capital return and NNI’s $1.00/shr special dividend.

Increasing estimates and target price. We are increasing our 2012, 2013 and 2014 estimates to $4.50, $4.85 and $4.85 to reflect 3Q results, loan purchases of $1.1Bn in 4Q, and a stronger FFELP NIM. Further FFELP purchases of $1Bn would add ~$0.15/share to our EPS estimates. Our sum-of-the-parts target price valuation increases $4 to $33. A 6% discount rate on the FFELP portfolio cash flows implies $21/shr of value. We then
attribute $12 to the fee-based businesses based on 2013 EPS projections for the businesses to reach our $33 price target, or 1.2x forward TBV.