Monday, November 26, 2018

A Current AIM Program Small Cap Equity Holding: Axos Financial, Inc. (AX) by: Brandon Shanklin. "Inorganic Bounce Back?"

Axos Financial, Inc. (AX, $30.24): “Inorganic Bounce Back?”
By: Brandon Shanklin, 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.


Axos Financial, Inc. (NYSE:AX) engages in the provision of banking and financing services for single and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables.

• AX has completed 3 acquisitions in the past 7 months further diversifying their lending and funding.
o   Acquired WiseBanyan, Inc. on October 25th, 2018.
o   Acquired COR Clearing LLC on October 1st, 2018, pending for approval.
o   Acquired business and assets of bankruptcy trustee and fiduciary service business of EPIQ Systems Inc. on April 4th, 2018.

AX inorganically acquired $3 Billion of deposits from Nationwide Bank on August 4th, 2018, which could very much lead to lower interest costs and an addition of customers.

• Over the past year and a half there has been a 17% drop in institutional holdings, which may signal a loss in faith from institutions, but 73% of holding are still owned by institutional investors meaning there is still belief that AX is poised for long term growth.

• Introduced and integrated a new platform called Universal Digital Bank, which converts Axos’ platform to a single platform where they have full control of the data which introduces mass customization.

Key points:

In attempt to rebrand, Axos Financial, Inc. switched their name from Bank of The Internet (BOFI).  This attempt to rebrand and deliver a different assuring perception to its clients lead to Axos Financial, Inc. making a large amount of costly money moves as of late to improve production and operations.  This rebranding may not have been effective and did not taste well with clients as their stock price has dropped significantly since. 

In the last earnings call, CEO Greg Garrabrants said that “banking will distribute itself such as vertical software providers linked to banking services”, which comes after their Universal Digital Bank implementation. With this new introduction of Universal Digital Bank, or UDB, it will provide banking products and services from Axos and it’s clients through a single software system.  UDB was developed in-house instead of outsourcing to a third party company for development, making it a lengthy and expensive feat for AX.  This platform will give the company the ability for mass customization, automation, and increase cross-selling opportunities to clients. 

In August, Axos Financial acquired $3 billion in deposits from Nationwide. The deposits are made up of $1 billion in low-cost checking, savings, and money market accounts, along with $2 billion in higher-interest time deposits.  In October, Axos Financial furthered its business with Nationwide and signed a master relationship agreement which Axos will provide co-branded banking products and services to Nationwide clients and joint marketing of Axos banking products and services to existing Nationwide clients.  This is a strategic move for Axos as it should introduce them to new clients and more guidance from a strong brand like Nationwide.

Book value per share for AX has been increasing at an average growth rate of 8.15% and was reported at $14.59 in the past earnings report meaning Axos has been able to take a step in the right direction by utilizing their new acquisitions and take advantage of their big money moves and increase their equity through production. 

What has the stock done lately?

Since their rebranding attempt and name switch, Axos Financial stock is actually down -20.33% in the past three months.  Although this is alarming, it should not overshadow its 19.9% stock  growth overall in the past year.  In the past 6 months it reached its high at $44.38 and currently is at $30.24.  With the recent acquisitions, Axos must take advantage of its inorganic additions and improve production and in turn might give them a boost, if not thy will continue this downfall.

Past Year Performance: 

AX is on a current downward trend, but has increased 19.90% in value over the past year. The closing gap between AX’s market valuation and book value per share is slightly concerning as investors may be losing confidence in management and operations ability to implement and integrate affective strategies.

Source: FactSet

My Takeaway:

Axos attempt to rebrand started on a sour note to their clients and obviously the market, but with recent acquisitions and progress with Universal Digital Bank they are taking a big step in a positive direction. Even though it will take time to fully see the results and actual impact these acquisitions will, management is definitely taking the initiative to improve production and efficiency which is promising. These moves could lead to lower operational costs and interest costs, and higher productivity, but management must utilize it in the right way for its value to increase.

Source: FactSet