2023-12-12 12:08:10 ET
Summary
- Shares of Axos Financial have risen by 30.4%, despite no new financial data being released, indicating speculative thinking.
- The addition of Sara Wardell-Smith, former head of North American commercial business at Visa, to the board suggests exploration of new opportunities.
- Axos Financial's acquisition of two loan portfolios from the FDIC at a discount of $463.7 million presents attractive potential for the company.
Odds are, if you are in the markets, you have heard of the idea that they follow a 'random walk'. This means that, no matter who you are, you cannot reliably and consistently know where a company's share price or where the market's level is going to be five minutes from now, an hour from now, or a year from now. As new information is incorporated into the market, share prices fluctuate. When it comes to individual companies, this many times comes about after a new release of earnings data. But that's not always the case. Sometimes, there are other developments that serve to push shares higher.
A great example of this can be seen by looking at a relatively small financial conglomerate known as Axos Financial ( AX ). From November 30 through the time that I am writing this on December 11, shares of the company have risen by 30.4%. This comes at a time when no new financial data has been released. However, there have been two interesting developments that deserve attention. The first of these was likely responsible for a 16.6% rise in the company's stock price, while the second looks to be responsible for a further increase of 11.8%. The fact that one of these is not a fundamental change so much as a qualitative change suggests that there is some speculative thinking behind this surge in pricing. But when you consider the company's overall track record for growth, I would be willing to bet that good things will come from both of these developments in the long run.
A welcome to Sara Wardell-Smith
In a press release issued on November 29, the management team at Axos Financial announced that Sara Wardell-Smith had been elected to the company as an independent director for the Board of Directors for both the company as a whole and for its subsidiary, Axos Bank. Generally speaking, I think too much weight is placed on leadership changes at companies. If it is somebody truly significant like Warren Buffett coming on, or an activist investor, the story is different. And in this case, I think we have something more similar to that.
According to the press release discussing Wardell-Smith's addition to the company, management describes her recent leadership as the former head of the North American commercial business at payment processing behemoth Visa ( V ). While there, she oversaw product initiatives, partnerships, sales, and the company's platforms. She worked on initiatives that, 'modernized beyond cards into real-time payments, cross-border payments, and new payment flows.' This is a massive area of focus that is on the true cutting edge of financial technology. Prior to her time there, she had some other experiences, such as serving as an Executive Vice President at Wells Fargo ( WFC ). At one point, she also served on the board for the US operations of Revolut, which is a massive and rapidly growing financial tech company based out of Europe.
Many financial companies, even these days, are pretty traditional in terms of how they approach business. However, Axos Financial has proven itself to be an exception to this. Operationally speaking, the company has two different segments. The first of these is the Banking Business, which provides a wide array of banking services that include online banking, the origination of mortgages, vehicle financing, unsecured lending opportunities, and so much more. It even helps to handle certain services for those going through Chapter 7 bankruptcy. Then, there is the Securities Business, which includes the firm's clearing broker-dealer, its registered investment advisor custody business, its registered investment advisor, and it is introducing broker-dealer lines of operations. It even provides customers with specialized accounting software that helps in certain family office and wealth management capacities.
Innovation has been key for the institution, especially in recent years. Its clearing broker-dealer boasts 320,000 clients, including 236 RIAs. Its Axos Invest platform services 29,000 clients and, launched in the first quarter of 2022, the company has a self-directed trading platform known as Axos Trading. As of the end of the first quarter of its 2024 fiscal year, the company's clearing firm had $33.9 billion in assets under custody. The banking side of the business is also rather significant in size.
From 2021 to 2023 , the value of deposits at the bank expanded from $10.82 billion to $17.12 billion. By the end of the first quarter of this year, the company expanded further to $17.57 billion. The overall growth of the company has permitted it to grow its cash and cash equivalents from $1.04 billion back in 2021 to $2.41 billion as of the end of the most recent quarter. At the same time, the value of securities increased from $189.3 million to $237.4 million. Debt has more than doubled, but it still remains quite low at $447.7 million. With the growth in assets the firm has seen in recent years, it has also seen both profits per share and book value per share climb at an annualized rate of around 16.4%.
All throughout the company's latest investor presentation, management makes clear just how focused the company is on all things digital. It also seems to have a firm understanding of how the industry for wealth management is changing. They cite, for instance, fee compression for both active and passive investment managers as an issue. They see the trend of advisers leaving major firms to become independent advisers and they mentioned multiple times the digitization of wealth management services. By providing the securities industry with a wide array of services and other revenue-related opportunities, the company hopes to further grow over time. Having a heavy hitter like Wardell-Smith join its board has clearly been perceived by the market as a way for the company to explore other opportunities and make sure that the path it has already set itself on continues to be navigated appropriately.
A great investment
The second major development for the company came out on December 7. At that time, management announced that the company had acquired two different loan portfolios from the FDIC. Combined, these portfolios have $1.25 billion of unpaid principal balance. However, management was able to purchase these for just 63% of the par value. That means that the company paid $789.5 million for these loans, locking in a discount of $463.7 million. Unfortunately, management stated that they will not provide more comprehensive details until after they release financial results sometime next year. But what data we do have suggests that this could be a really attractive maneuver.
The largest of these two loan portfolios includes multifamily and mixed-use properties. They represent $674.6 million of unpaid principal balance. They have a 7% weighted average yield based on the principal and have a weighted average loan to value ratio of 67%. The other $578.6 million involves commercial real estate loans. It has a similar interest rate of 6.8% but has a substantially lower weighted average loan to value ratio of 50.2%. All combined, the 58 loans in the two different portfolios have a 6.9% yield and a 59.3% weighted average loan to value ratio. But what's really cool is that, in addition to all of the loans being current on principal and interest, the borrowers have back-to-back interest rate swaps that permit them to pay an average fixed rate on the debt of only 3.8%. Even so, Axos Financial receives the 6.9% average, with the difference being covered by some unfortunate third party.
While it is highly possible that some of the value of these loans will ultimately disappear because of low quality, this arrangement brings with it substantial upside potential, especially for a company with a market capitalization of only $2.9 billion. On top of all of this, there is the fact that the effective interest rate paid to Axos Financial as a result of the discount it's getting on these assets should be just shy of 11%. That's great, even in this market. It is also worth noting that the company does have a history of playing in this space. As of the end of the most recent quarter, about $2.13 billion, or 12.4%, of the $17.16 billion worth of loans that the company had were in the form of multifamily assets. Another $6.17 billion, or 35.9%, involves commercial real estate. So it is almost certain that management has a firm understanding of the risks and upsides associated with this purchase.
Takeaway
Based on the data provided, I would argue that Axos Financial is doing really well for itself right now. The company has a great history from a growth perspective, and management has proven itself to be interested in cutting-edge initiatives. The new leadership addition should bear fruit if all goes according to plan, while the asset purchase entered into earlier this month should create the potential for additional value for investors in the years to come. Due to all of these factors, I've decided to rate the business a very solid 'buy' at this time.
For further details see:
Axos Financial Surges On 2 Big Developments