Axos Financial Inc. (AX, $52.91): “Bottom Line Top of Mind”
By: Anwar Ahmed, 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
• Axos Financial Inc. (NYSE:AX) is a full-service digital bank and
holding company that offers banking, lending, and investment solutions to
individuals and businesses throughout the US.
• AX acquired the wealth
management tool E*TRADE Advisor Services (EAS) from Morgan Stanley for $54.9
Million in an all-cash deal.
• Derrick Walsh was appointed as
Senior VP and CFO in September 2021 bringing valuable industry knowledge and
experience to upper management.
• Shift to expense reduction
strategy by leveraging non-interest-bearing investment deposits.
• Strong housing market and low
interest rates provided favorable lending opportunities and reduced interest
expense.
Key
points:
Axos
Financial Inc. posted a record net income of $215.7M for FY21 driven by a
reduction in interest expense over the past year. Total YoY interest expense
fell by 45.5% from growing the non-interest-bearing deposit base and the
overall low interest rate environment.
Despite
FY21 revenue falling 0.8%, mortgage trading and fee revenue continue to show
strong growth. YoY mortgage banking income is up 101% fueled by the strong
housing market and persistent 3ed party demand for mortgages. Overall
non-interest revenue is up 2.2% with growing exposure to fee producing income
sources.
The
acquisition of E*TRADE Advisor Services (EAS) continues to diversify revenue
away from interest rate sensitive sources. EAS will strengthen the strategic
partnership strategy by allowing wealth advisors to leverage the Axos
investment platform. This will bring low-cost deposits as well as improve
trading and clearing fee revenue.
Interest
expense reduction strategy fueled by 27.8% increase in non-interest-bearing
deposits. Total interest-bearing deposits fell by 11.3% further strengthening
bottom line. This effect was magnified in FY21 as rates fell to historic lows.
What has the stock done lately?
AX shares have risen 12.3% in the
past month ahead of FY22 Q1 earnings results. Q1 EPS consensus is $0.88 with
many analysts expecting earnings beat due to strong macroeconomic tailwinds. AX
has posted $0.90 EPS last quarter and has historically beaten estimates by an
average of 7% for the past 2 quarters. Investors appear optimistic this trend
will continue.
Past
Year Performance:
Over the past year, AX has shown
an impressive rally with the share price rising 90%. In the same period, the
S&P 500 index rose 32% and the benchmark Russell 2000 index rose 40%.
My Takeaway
The growing popularity of digital
banking and macroeconomic tailwinds are the key driving factors for the strong
performance AX has shown over the past year. The focus on bottom line
performance has made AX highly desirable in the competitive banking sector where
top line growth is difficult to achieve. Despite the strong stock performance,
AX still trades at an attractive P/E multiple of 14.8 relative to the industry
average of 17.8. Changing macroeconomic conditions are likely to influence near
term performance. Speculation about rising interest rates and reduced housing
demand may cause demand pressure in the core mortgage lending business.
However, strong fee revenue and reduced interest rate exposure is likely to
curb any major changes in profitability in the near term. The key success
factors for AX are successfully integrating new acquisitions to achieve cost
and revenue synergies while finding new acquisition targets to expand
operations.
Source: FactSet
