Home Equity Boom Overshadowed By Analysts' Grim Revenue And Margin Predictions

Key Takeaways

• Innovative retirement products targeting the senior demographic and HomeSafe Second expansion are set to drive revenue growth through home equity opportunities.
  
• Digital-first channel strategy and brand integration are expected to enhance efficiency, profitability, and financial flexibility amidst market uncertainties.
  
• Strong strategic execution and market capture position Finance of America for sustainable growth and enhanced financial flexibility.

Catalysts

A financial service holding company, through its subsidiaries, engages in the operation of a retirement solutions platform in the United States.

• The company's innovative home equity-based retirement products, specifically targeting the growing senior demographic, are expected to drive future revenue growth amid a record amount of home equity and a near doubling of the senior population by 2050.
  
• Finance of America's new digital-first channel strategy is likely to improve production efficiency and reduce origination costs, potentially enhancing net margins as they enhance the customer experience and streamline operations.
  
• Expansion and reduced interest rates for the HomeSafe Second product are anticipated to drive increased volumes and subsequently boost revenues by providing solutions for older homeowners to access home equity without refinancing their first lien mortgage.
  
• Continued integration and brand unification efforts are projected to enhance operational efficiencies and market presence, improving profitability and sustained growth through cost management and revenue generation.
  
• With increased funding volumes and successful securitizations, Finance of America's financial flexibility and favorable trend in reverse mortgages position it for long-term earnings growth despite anticipated market uncertainties.

Finance of America Companies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Finance of America Companies's revenue will decrease by -25.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.2% today to 1.0% in 3 years time.
• Analysts expect earnings to reach $3.1 million (and earnings per share of $0.33) by about December 2027, down from $173.8 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 102.4x on those 2027 earnings, up from 1.6x today. This future PE is greater than the current PE for the US Diversified Financial industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 26.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Finance of America Companies Future Earnings Per Share Growth

Risks

• Finance of America has demonstrated improved financial results with positive net income, adjusted net income, and adjusted EBITDA, suggesting strong execution of strategic initiatives, which can positively impact earnings.
  
• The company has exceeded volume guidance, reflecting its ability to capture market opportunities and drive revenue growth, likely leading to higher future revenues.
  
• Finance of America has completed a reverse stock split and exchange offer, enhancing financial flexibility, which strengthens the balance sheet and supports ongoing profitability and growth.
  
• Focused growth in the senior home equity-based retirement product market, a demographic expected to grow significantly, positions the company for sustained revenue increases and market share expansion.
  
• Successful marketing and streamlined operations have resulted in increased productivity and enhanced customer experience, potentially leading to increased market penetration and margins.

Valuation

• The analysts have a consensus price target of $25.5 for Finance of America Companies 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 $300.2 million, earnings will come to $3.1 million, and it would be trading on a PE ratio of 102.4x, assuming you use a discount rate of 10.9%.
• Given the current share price of $28.8, the analyst's price target of $25.5 is 12.9% lower.
• 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.