Technology Focus And Loan Expansion Will Improve Future Efficiency

Key Takeaways

• Strategic hiring and technology focus aim to improve efficiency and risk management, enhancing net margins.
  
• Differentiated business model and loan program expansion drive revenue growth, outpacing peers.
  
• Higher credit loss provisions, sustainability concerns surrounding risk-adjusted returns, and potential credit issues raise risks for future earnings and profitability.

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 strategic hiring of high-level technology and management positions, including a Chief Technology Officer, suggests a focus on leveraging technology for growth and better risk management, potentially improving net margins through increased efficiency.
  
• Expansion of the Alternative Loan Program, as a key revenue growth driver, is projected to elevate earnings per share as it gains traction, reflecting positively on future revenue.
  
• The company's focus on business model differentiation, with a strong emphasis on providing business and financial solutions, positions it to outpace peers in revenue growth due to unique offerings.
  
• Significant deposit growth (12%) and loan growth (17%) at Newtek Bank indicate potential for increased revenue from interest income and expanded banking relationships, supporting higher net interest margins.
  
• The introduction of Newtek's zero-fee banking accounts for businesses is expected to attract more deposits, potentially lowering funding costs and enhancing net margins and profitability.

NewtekOne Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NewtekOne's revenue will decrease by -1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.2% today to 25.1% in 3 years time.
• Analysts expect earnings to reach $75.8 million (and earnings per share of $2.87) by about December 2027, up from $41.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.1x on those 2027 earnings, down from 8.3x today. This future PE is lower than the current PE for the US Diversified Financial industry at 17.9x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

NewtekOne Future Earnings Per Share Growth

Risks

• The company's provision for credit losses was higher than expected, potentially impacting net margins and future earnings if credit quality does not improve.
  
• Concerns regarding the sustainability of current risk-adjusted returns and high return on assets (ROAA) raise questions about the company's ability to maintain these figures, which could affect overall earnings.
  
• The recent ramp-up in nonaccrual loans at the bank could signal potential credit issues, leading to increased loan losses that might negatively impact future earnings.
  
• The company's reliance on a differentiated business model includes high-margin, high-risk loans, which could face challenges or greater scrutiny from regulators, potentially affecting revenue and profitability.
  
• The complex transition from joint ventures to on-balance sheet funding, along with uncertainties in credit assumptions and reserve levels, could lead to volatility in financial results and impact net margins.

Valuation

• The analysts have a consensus price target of $14.42 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 $16.7, 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 2027, revenues will be $302.1 million, earnings will come to $75.8 million, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 7.1%.
• Given the current share price of $13.19, the analyst's price target of $14.42 is 8.6% 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.