Advanced Technology Will Improve Efficiency In Client Acquisition And Loan Management

Key Takeaways

• NewtekOne's transition to a financial holding company and use of technology-driven solutions enhance growth potential and disrupt the banking industry.
  
• Strong performance metrics and diverse income strategies suggest robust earnings growth and shareholder value creation.
  
• Transition risks to a federally regulated bank, technology reliance, credit management challenges, noninterest income volatility, and macroeconomic factors could strain profitability and efficiency.

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.

• NewtekOne's transition from a business development company to a financial holding company with a nationally chartered bank is expected to enhance its future growth potential, improving net interest income through efficient client acquisition and stronger loan and deposit growth. This is likely to positively impact revenue and net interest margins.
  
• The company's use of proprietary, advanced technological solutions to acquire customers and manage loans more efficiently places it as a disruptor in the banking industry, akin to Uber and Amazon. This positions NewtekOne to achieve higher customer acquisition rates and better loan risk management, supporting enhanced net margins and earnings.
  
• NewtekOne's strong performance metrics, such as a 43% improvement in EPS and a 36% increase in net interest income year-over-year, indicate robust future earnings growth. These results, coupled with the company's healthy dividend policy, suggest strong potential for shareholder value creation.
  
• The company's focus on technology-driven, value-added services through its Newtek Advantage business portal differentiates it from traditional banks, leading to lower customer acquisition costs and more valuable and sticky client relationships. This strategy is poised to sustain and increase future revenue streams.
  
• The anticipated growth of NewtekOne's alternative loan program (ALP) and 7(a) business positions the company to diversify its income sources and capitalize on high-margin lending opportunities. This growth strategy is expected to enhance earnings resilience and profitability.

NewtekOne Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NewtekOne's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.5% today to 22.4% in 3 years time.
• Analysts expect earnings to reach $76.4 million (and earnings per share of $2.88) by about March 2028, up from $49.3 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 7.6x on those 2028 earnings, up from 6.6x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.4x.
• Analysts expect the number of shares outstanding to grow by 6.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.32%, as per the Simply Wall St company report.

NewtekOne Future Earnings Per Share Growth

Risks

• As NewtekOne continues transitioning into a federally regulated bank, there may be inherent execution risks and regulatory challenges that could affect profitability and operational efficiency, impacting net margins.
  
• The focus on technology as a primary driver of client acquisition and service, while innovative, presents a risk if technological issues arise, potentially affecting revenue and earnings consistency.
  
• The discussion of higher expected charge-offs and credit risk management suggests potential strains on profitability if credit conditions deteriorate further, impacting net income.
  
• The presence of noninterest income as a significant component of earnings introduces volatility risk, where fluctuations could adversely affect profitability if not managed properly.
  
• Uncertain macroeconomic conditions and interest rate environments could impact NewtekOne’s loan growth and cost of funding, leading to potential mismatches that might affect revenue and net interest margins.

Valuation

• The analysts have a consensus price target of $15.14 for NewtekOne based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.7, and the most bearish reporting a price target of just $13.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $341.4 million, earnings will come to $76.4 million, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 7.3%.
• Given the current share price of $12.31, the analyst price target of $15.14 is 18.7% higher.
• 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.