Overcoming Market Volatility With Innovative Finance And Technology-Driven Growth

Key Takeaways

• Strategic initiatives in loan program securitization and low-cost deposit accounts diversification signal strong future profitability through innovative finance and cost efficiency.
  
• Reaffirmation of 2024 EPS guidance amidst market volatility and operational achievements suggests investor confidence and potential for enhanced stock valuation.
  
• NewtekOne's profitability and growth prospects face risks from high financing costs, dependency on loan securitizations, and operational challenges in technology initiatives.

Catalysts

Operates as the bank holding company for Newtek Bank, National Association that engages in the provision of various business and financial solutions under the Newtek brand name to the small- and medium-sized business market.

• Demonstrated ability to exceed earnings expectations and a positive beat on EPS indicates operational efficiency and market underestimation, potentially impacting future revenue and earnings growth positively.
  
• Reaffirmation of 2024 EPS guidance amidst market volatility shows confidence in stable future earnings, likely impacting investor sentiment and stock valuation.
  
• Significant quarterly deposit and loan growth outperforming industry averages suggests strong market demand and operational scalability, which could lead to enhanced revenue and net interest margin expansion.
  
• Completion of a substantial Alternative Loan Program securitization demonstrates the company's innovative approach to finance, diversifying income sources beyond traditional banking pathways, expected to positively impact non-interest income.
  
• Strategic focus on growing low-cost deposit accounts and leveraging technology for client acquisition and service efficiency signals potential for margin improvement and reduced operational costs, contributing to future profitability.

Assumptions

• Analysts are assuming NewtekOne's revenue will decrease by -6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.5% today to 28.6% in 3 years time.
• Analysts expect earnings to reach $69.8 million (and earnings per share of $2.66) by about September 2027, up from $40.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.8x on those 2027 earnings, down from 7.8x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.0x.
• Analysts expect the number of shares outstanding to grow by 5.24% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.94%, as per the Simply Wall St company report.

Risks

• NewtekOne's reliance on securitizations and associated higher costs of financing might strain profitability, potentially affecting net margins due to the SOFR plus 250 basis points cost compared to the cheaper funding through its bank.
  
• The company acknowledges higher expenses for credit losses, anticipating an impact on earnings, which could adversely affect net income if losses exceed provisions.
  
• A considerable portion of NewtekOne's revenue is contingent upon successful loan securitizations, as demonstrated by significant alternative loan program activity. Fluctuations in the securitization market or investor appetite could impact revenue and gross margins.
  
• NewtekOne's strategy includes significant growth in business deposits aiming for low-cost funding. Any failure to attract and retain these deposits could affect liquidity and interest expense.
  
• The ambitious expansion and reliance on technology-enabled business solutions, including the patent-pending Newtek Advantage business portal, incorporate operational and execution risk. Failure to deliver on these innovations could hinder growth prospects and revenue diversification.

Valuation

• The analysts have a consensus price target of $13.0 for NewtekOne based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $244.0 million, earnings will come to $69.8 million, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 6.9%.
• Given the current share price of $12.2, the analyst's price target of $13.0 is 6.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.