October 11, 2007
SLM Earnings Released and It Doesn't Look Good
The earnings release is accessible here. A few initial very preliminary observations:
- SLM's core earnings fell 19% to $259 million, or 59 cents a share, from $321 million, or 73 cents a share, a year earlier, missing average analysts forecasts by about three cents a share. This includes an 11 cents a share in charges from recent legislative changes and the buyout ($28 million and $18 million, respectively). On this basis, I calculate that the earnings drop attributable to the new Bill is thus far about a nine percent drop in earnings for the 3rd quarter. That is a big drop but according to SLM the hit this quarter is non-recurring and therefore would likely not be considered a MAC by Delaware in the earnings context. So, we will need another quarter to begin to see the full effects of the Bill on SLM's earnings and whether it does indeed arise to the level of a MAC. Unfortunately, SLM does not make any statements about this in their press release. I haven't listened to the conference call yet, but I assume many analysts will be asking this (and I assume they will defer any answer due to the pending litigation).
- With the exception of growing assets, SLM missed guidance on EPS growth, loan spread and other income growth. Note that SLM withdrew this guidance on April 24, 2007 after a deal was reached with the Flowers group. I don't have enough information on this to speculate as to whether this further sustains a MAC claim but it no doubt is a driver in the Flowers group's current hesitancy to complete this deal at $60 a share. While the MAC definition does not exclude out failure to meet projections in IBP v. Tyson the Delaware court's refused to find a short term failure a MAC; rather any change to earnings must be long term and materially significant. It remains to be seen whether these failures meet that test.
- SLM makes no mention of the dispute with Flowers or otherwise any statements on the current litigation. They also make no forecasts about future earnings or as I said before, the effect of the Bill on the entirety of their operations and core earnings generally.
So, on initial glance not a great quarter for SLM, but I'm still not sure how this plays into the MAC interpretation other than as a driver for the Flowers group to use SLM's deteriorated position to renegotiate a price. I'll have more tomorrow once I listen to the earnings call.
Final Note: My sources say no food at the SLM in-person meeting today. Only soda and tap water.
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