Nelnet Annual Results (Issue #62)
Nelnet (NYSE: NNI — $3.54b) just had its annual meeting and released its annual report. Unfortunately, I was unable to attend the meeting, but here are the key points from the report.
Executive Chairman Mike Dunlap warned once again of the problems that come along with sudden and sizable cash infusions into the economy. This mainly hinders more “growthy” and risky companies (i.e. SPACs, “growth-at-all-costs-focused” companies, and much more). In addition, other economic implications include an overall increase in global energy costs. This impacts Nelnet since they are in the space, but not as much as European utilities.
The comment that stood out to me the most:
“…the market was no longer valuing growth for growth’s sake and how investors were now valuing positive net income and positive cash flow. It was great to hear market participants start to validate what we have always valued as a leadership team and have attempted to achieve in all our businesses, which is growing after-tax cash flow over a long-time horizon.”
- Nelnet 2022 Annual Report
The idea that Nelnet doesn’t have to change their goals or operating philosophy in tough times shows how built to last and bulletproof they truly are. They never try to blow one quarter out of the water instead they try to be as consistent as possible and keep the company orderly and purposeful.
Nelnet has reported a 16.6% book value per share CAGR (dividends included) annually on average since 2004. Yet Nelnet says this still doesn’t fully reflect the value they are creating as a company.
ALLO Nelnet’s Fiber Optics and Communications holding operates in Nebraska, Colorado, and Arizona has reported a total loss since 2020 of $114m. This was caused by Hypothetical Liquidation at Book Value (HLBV) methods of accounting. However, Nelnet believes the asset’s value has increased enough to surpass the loss. ALLO has 131,000 fiber lines in the grounds and that number is still increasing.
Hudl is the high school sports highlight service that is partially owned by Nelnet. 95% of all high schools use Hudl for their sports teams. Nelnet’s investment was $134m at the end of 2022. While Hudl’s last fundraising round was May 2020 Nelnet purchased $32m in shares from existing shareholders in February of this year. This was not technically an observable market transaction, but Nelnet is still confident in the company going forward with little to no additional thoughts on the investment.
Nelnet’s renewable energy especially in solar is a key place where they produce hidden value. For example, their tax equity from solar totaled $278m at the end of 2022. $175m of that is being held on the balance sheet, the rest was syndicated to co-investors.
In 2022, Nelnet acquired $722m in Federal Family Education Loan Programs (FFELP): $289m consumer loans, $243m private education loans, and $227m home equity line of credit (HELOC) loans. Although Nelnet is confident in their loans they are required to book a day one loan loss on the income statement. This loss should be recouped in the loans pay off as expected. The total booked losses totaled $46m for 2022, however again this can still be recouped. The entire loan portfolio is projected to generate $1.46b in future cash flows.
Nelnet has done significant investments in real estate. They have already realized $45m in gains from selling some of their holdings. The remainder is valued at $80m, but they believe they can sell for much more.
Total cash deployments for 2022 were $1.36b. More than half of this ($667m) went to real estate and solar investments. Loan acquisition was the second-highest investment at $269m. Similarly to Boston Omaha LINK Nelnet works to hide value within its assets. This allows them to be underrated and realize more gains later on. The long-term aspect of this strategy is crucial to their continued success.
Nelnet Business Services (NBS) is an umbrella of services and products. It contains a payment processor for tuition payments. These payments are less often, but they are consistently recurring and are far higher than typical processing fees. NBS has served over 4m students at 11,000 schools between all of its services.
Looking Forward (Pillars):
Enhance Customer Experience
Grow Core Business Segments
Diversify Products and Services
Energize Associates
Exceed Financial Targets
Continue To Reposition For The Long-Term
Boston Omaha also had Pillars for the business looking forward. I think every company should have standards and goals like this to maximize continuity within a business and align teams to work towards common goals.
Portfolio Updates:
Watchlist Updates:
For access to the full spreadsheet and the linked deep dives go here.
Until Thursday,
Soren
Disclaimer: Soren Peterson and Pillars And Profits Newsletter are not responsible for any financial results. Soren Peterson and Pillars And Profits Newsletter may have holdings in the securities discussed in this newsletter. Nothing in this or any other Pillars And Profits Newsletter should be taken as financial advice. Always do your own research.