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.
Summary
• 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.
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| Past 5 days performance of NEWS |
