Critical Growth And Digital Expansion Propel Profits, Despite Looming Loan And Margin Challenges

Key Takeaways

• Axos Financial's strategic initiatives in operational efficiency and product diversification are poised to enhance revenue streams and optimize profit margins.
  
• Investment in technology and a focus on operational efficiencies aim to improve customer engagement and service delivery, potentially expanding the customer base.
  
• Axos Financial faces challenges including liquidity issues, reduced loan growth, increased competition, and higher expenses impacting revenue and margins.

Catalysts

Provides consumer and business banking products in the United States.

• The strategic and operational initiatives driving double-digit year-over-year growth in earnings per share, book value per share, and ending loan balances, which might suggest a robust approach to generating higher revenues and improving profit margins, impacting future growth positively.
  
• A significant increase in deposits, especially noninterest-bearing deposits, which may lead to lower funding costs and higher net interest margins, thus possibly improving net income.
  
• Axos Financial's focus on diversifying its lending and deposit business to grow profitably, illustrating a forward-looking strategy that could enhance revenue streams and spread risk, potentially contributing to higher earnings.
  
• The company's ability to maintain a strong net interest margin due to the successful execution of strategic moves like the FDIC loan purchase, which is expected to provide a net interest margin benefit, could lead to an improvement in net interest income and overall financial performance.
  
• Axos Financial's investment in technology and operational efficiencies, such as the migration of small business customers to a new digital banking platform, aiming at better customer engagement and service delivery, which might increase customer base and deposits, impacting future growth positively through increased service utilization and cross-selling opportunities.

Assumptions

• Analysts are assuming Axos Financial's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 42.5% today to 0.3% in 3 years time.
• Analysts expect earnings to reach $420.8 million (and earnings per share of $7.21) by about September 2027, down from $450.0 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 11.1x on those 2027 earnings, up from 8.8x today. This future PE is lower than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to decline by 5.15% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The reliance on high loan repayments which may not meet expectations could lead to excess liquidity challenges, potentially affecting net interest margins and revenue.
  
• A mediocre loan demand climate coupled with tighter spreads indicates the possibility of reduced loan growth and profitability, affecting earnings and interest income.
  
• Competition from other banks emerging from their issues could result in Axos losing market share or having to accept lower yields on loans, impacting overall revenue growth and margin expansion.
  
• Strategic decisions to allow repayments in certain loan categories due to interest rate and credit risk management may lead to a decrease in loan portfolio diversity, impacting revenue and increasing dependency on fewer loan categories.
  
• Investments in technology and product development, while necessary for long-term growth, may increase noninterest expenses in the short term, impacting net margins.

Valuation

• The analysts have a consensus price target of $82.33 for Axos 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 2027, revenues will be $1.4 billion, earnings will come to $420.8 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $69.43, the analyst's price target of $82.33 is 15.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.