Nelnet Q3 2024 Earnings Update (Ticker: NNI)
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On last week’s Power Hour podcast, we talked earnings, earnings, and more earnings. Check out the links above, I bet there is a company you are interested in.
Now, to Nelnet’s Q3 earnings.
Nelnet is by far my largest investment at 30%+ allocation in my retirement account. The stock jumped last week on the Trump election news + (perhaps?) the interest rate decrease. Then, it reported Q3 earnings and sank over 10%.
As a diversified conglomerate, let’s go through each Nelnet segment for Q3. Management does not do conference calls or give much commentary, but when they do they are generally quite honest.
Nelnet Diversified Services (Loan servicing)
Nelnet’s loan servicing is now under a new contract from the federal government. The segment is now unprofitable:
With cost-cutting, I believe this segment can get back to slightly positive profitability. I don’t expect it to generate material amounts of earnings compared to Nelnet’s $4 billion market cap.
Nelnet Business Services (Education software)
The education software/payments division is firing on all cylinders. Operating margin is increasing while revenue keeps climbing higher.
With operating earnings above $100 million and on the way to $150 million (along with good cash flow conversion) this segment should now be worth around $2.5 billion.
Asset Generation and Management (AGM)
AGM is Nelnet’s residual student loan book that will meaningfully wind down in a few years. The segment flipped to a $16 million loss in Q3 compared to a $41 million profit a year ago.
This loss came because of a combined $57.8 million write-down on loan securitizations, debt, loan losses, derivatives, and loan sales. Not a great quarter for the division, and I appreciate management providing the details here.
However, management still projects $1.18 billion in undiscounted cash flow coming from AGM over the coming years. Lower interest rates will be a tailwind for the segment.
How much value is left in AGM? I am not sure. But it is definitely not zero.
Nelnet Bank
Nelnet Bank is an officially licensed bank that will take over a lot of the loan operations from AGM (private companies aren’t allowed to originate student loans anymore).
This quarter, Nelnet Bank flipped to a net loss of $5 million due to recognition of loan losses. Again, not great lending from Nelnet this quarter. The move beyond student lending is proving difficult.
Banking is still new and small for Nelnet. Over time, I think they will figure out the lending given its history. The most important KPI (thank you Finchat) is banking assets, which continue to grow:
NFS Other
The Financial Services segment for Nelnet is tricky. This “other” segment is a bit of a mystery. Last quarter, it generated a $14 million profit for the parent company. Not bad.
How did it do that? The commentary:
“An increase in net interest income and net gains related to the Company's investment securities.”
Great. We know nothing about why this division is generating a profit. I have no way to estimate the future here, but won’t say no to these profits.
ALLO Investment
Nelnet has a large stake in fiber-to-the-home provider Allo Communications. Using a complicated accounting structure, the company has been able to recognize losses on its Allo investment even though the business is doing fine.
Those stopped last quarter. Now, it has a preferred investment in the company that led to $6.6 million in pass-through earnings for the segment. Great, and a steady income generator that won’t stop anytime soon.
Renewable energy construction
The recently acquired solar panel construction business is struggling. Nelnet decided to leave the residential solar market and has done a lot of write-downs for this segment.
Exiting the residential market will take time, but it shouldn’t permanently impair the business. Nelnet took a $10 million loss for the segment in the quarter, one I hope they can turn into a profit within a few years.
I assign zero value to this segment today.
Solar equity investments
Nelnet makes solar financing investments for itself and third-parties. It does so for the big tax write-off that comes with making renewable energy investments.
On its accounting statements, this segment posts consistently stated operating losses due to the tax credits even though the projects should generate decades of consistent cash flow.
There is a lot of value in this segment. I just don’t know how much. A good chunk of Nelnet’s cash flow is reinvested into these deals.
Summing it all up
A few of Nelnet’s segments are struggling right now (the bank, AGM, solar construction, and loan servicing), and yet, the company still has a clear path to compounding value for shareholders.
There is over $1 billion in cash flow coming from the existing loan securitizations. The education/payments software division is generating over $100 million in cash flow every year and grows consistently. There is likely value in Nelnet Bank, solar financing, and the Allo Communications stake even if it doesn’t look like it today.
Don’t forget its large venture capital investments, including a 20% stake in HUDL likely worth hundreds of millions of dollars if not $1 billion.
I still believe Nelnet is worth around $6 billion today with a management team that has a track record of growing per-share value at an above-average rate. Today, the market cap is $4 billion.
It keeps returning more cash to shareholders with dividend per share growing at 10%+ since 2014:
I still plan on keeping Nelnet as the largest position in my portfolio.
-Brett
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