Expanding Loan Pipeline In Niche Markets Will Support Future Financial Stability And High Returns

Key Takeaways

• Strategic positioning in niche markets enables capital-light earnings growth, supporting high potential returns and financial stability.
  
• Execution of securitizations enhances net margins, reducing funding costs and indicating a robust financing environment.
  
• Velocity Financial's high non-performing loan rate and reliance on volatile markets and non-GAAP measures pose risks to margins, earnings, and investor confidence.

Catalysts

Operates as a real estate finance company in the United States.

• Velocity Financial's origination volumes grew by 64% year-over-year, signaling strong demand for new loans and future revenue growth.
  
• The company successfully executed multiple securitizations, reducing their cost of funds and improving net margins, indicating a robust financing environment.
  
• With an expanding loan pipeline and expectations of reaching $5 billion in UPB by 2025, Velocity is well-positioned for future earnings growth.
  
• The resolution of non-performing loans is generating positive gains, which supports strong future net margins and overall financial stability.
  
• The company’s strategic positioning in niche markets with limited competition allows for capital-light earnings growth, sustaining high potential ROE.

Velocity Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Velocity Financial's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.8% today to 35.2% in 3 years time.
• Analysts expect earnings to reach $73.0 million (and earnings per share of $2.47) by about January 2028, up from $64.4 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 11.8x on those 2028 earnings, up from 10.1x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.9x.
• Analysts expect the number of shares outstanding to decline by 3.68% 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.

Velocity Financial Future Earnings Per Share Growth

Risks

• The company's non-performing loan rate has remained consistently high, averaging just over 10%, which could impact net margins and earnings if the situation worsens or if resolution gains decline.
  
• Velocity Financial's market niche seems to be under pressure from new entrants, which, if they materialize, could challenge the company's origination volumes and future revenue growth.
  
• Interest rate volatility may pose a risk to the origination pipeline even if currently stable, potentially affecting revenue and net interest income in adverse rate environments.
  
• Despite a robust securitization market, reliance on such a volatile and investor-driven market could impact the company's cost of funds and thereby compress net interest margins in less favorable conditions.
  
• Continued reliance on non-GAAP measures and adjustments to reflect true portfolio value carries risk, as fluctuations in these adjustments could impact perceived earnings and book value growth, possibly affecting investor confidence.

Valuation

• The analysts have a consensus price target of $21.75 for Velocity Financial 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 2028, revenues will be $207.3 million, earnings will come to $73.0 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 10.9%.
• Given the current share price of $19.56, the analyst's price target of $21.75 is 10.1% 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.