Saturday, April 15, 2017

A current AIM Fund holding: NewStar Financial, (NEWS) by Justine Shanner: “NewStar's Management Shines Strongly"

NewStar Financial, Inc. (NEWS, $10.62): “NewStar Financial Shines with New and Improved Strategies”
By: Justine Shanner, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

NewStar Financial, Inc. (NYSE:NEWS) is a commercial finance company providing specialized lending platforms for companies and private investors in the middle market. In addition to their Commercial Lending segment, NewStar also participates in Asset Management, with $3 billion of assets, specifically focused on several types of credit funds. NewStar Financial was founded in 2004, and is headquartered in Boston, MA.
• Market conditions indicate a growth in middle market loan issuance, up 38% in 4Q16, and 31% year-over-year. NewStar directly benefitted from the increase in loan demand, and increased their funding of new credit investments significantly ($671 million of new investment in 4Q17).
• Retained earnings and share repurchases prompted an increase in book value per share from $14.38 to $15.12. A new quarterly dividend policy of $0.02 was announced, which marks the first time NewStar has declared a dividend.
• Management made significant strategic decisions in FY2016, including: doubling asset management fee revenue, divesting from non-core businesses (resulting in $222 million in net cash proceeds), and introducing a $500 million flagship fund.

Key points:
NewStar’s management has made decisions in the past fiscal year that proved to be crucial in NewStar’s continued growth. Divestiture from equipment platforms not only generated a $6.7 million gain in 4Q17, but expects to allow a shift of focus to more specialized platforms with higher returns. The sale undoubtedly contributed to the total revenue increase of 44.9% in the past fiscal year.

Chairman and CEO Tim Conway commented on NewStar’s recent approach by emphasizing streamlining operations and cutting costs by eliminating non-core businesses. These changes have allowed NewStar to decrease baseline expenses by 33%. Divestiture from low performing platforms will reposition NewStar as a key player in middle market credit asset management.

“Out with the old, in with the new” seems to be the recent name of the game for NEWS, and the declared dividend policy in 1Q17 demonstrates management’s expectations to continue to see benefits from last fiscal year’s improvements. The rapid growth of new credit investments was due to the general activity of the middle market, and demand for M&A financing has showed no signs of slowing.

What has the stock done lately?
NewStar is currently trading at $10.62, with a 52-week change of 19.20%. EPS increased $0.37 to $0.61. Additionally, NEWS beat Street expected earnings in 3Q16 and 4Q17 by $0.06 and $0.08, respectively. Additionally, trading volume increased substantially following the February announcement of a first-ever dividend.

Past Year Performance: NewStar Financial is up month-to-date 1.51%, and year-to-date 16.11%. Share price has fluctuated between $6.53 and $11.37 over the past fiscal year, and the current price of $10.62 seems to reflect a confidence in a decreasing regulatory environment, and optimism for the Financial Services sector as a whole. With expectations of interest rates being raised 2 to 3 times within the year, margins will continue to grow as NewStar and will earn more on spread, and continue to experience stable demand for borrowing. I believe NewStar has the potential to move past their 52-Week High of $11.37 in FY17 as the benefits from strategic restructuring in FY16 continue to materialize, and new initiatives are implemented into earnings.  

My Takeaway
Tim O’ Donnell originally pitched NewStar in February 2011. He indicated that a lack of competition and a rebounding debt market will allow NewStar to succeed in the AIM portfolio, His expectation was correct, and middle market M&A financing activity is growing now more than ever. Six years later, NewStar has shown immense growth, acting as a key player in credit financing, and demonstrating an ability to adapt within a specialized market. Additionally, management decided to repurchase $30 million of common stock, expanding on an original repurchase program of $5 million. This offers yet another indication of management’s confidence moving forward after astronomical earnings growth and an optimistic FY2016. I recommend the AIM portfolio continues to hold NewStar, perhaps increasing our position given the new dividend policy.

Past 5 days performance of NEWS

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