Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Axos Financial Stock Fell 12% Today

By Jason Hall – May 1, 2019 at 1:52PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Higher expenses resulted in a big earnings miss for the high-growth online financial services company.

What happened

Shares of Axos Financial (AX -0.61%) were down 8.3% at 12:23 p.m. EDT on May 1, after opening trading with a sharp 12% decline. This followed the release of the company's third-quarter results after market close yesterday.

Axos reported a 9% increase in total assets to nearly $11 billion, but a 24% decline in net income seems to be driving investors to sell today.

So what

Axos' earnings weren't expected to reach last year's levels this past quarter, but the sharp decline the company reported was much bigger than expected. Reported earnings per share came in at $0.63, down from $0.80 last year.

A woman with an exasperated expression, in front of a chart of a declining stock price

Image source: Getty Images.

There was a pretty clear explanation why earnings fell: much higher expenses. Axos reported non-interest expense (bank-speak for operating expenses) of $81.8 million in the quarter, 80% higher than the year-ago quarter. Some of this increase was expected, as Axos has made several acquisitions over the past year, as well as adding expenses to grow its existing lending and financial service offerings.

However, a substantial portion of this quarter's higher expenses was related to one recent acquisition, and not in a good way. Axos completed the transaction of COR Clearing -- since rebranded Axos Clearing -- during the quarter, and this business has already resulted in a big potential loss. On the earnings call, CEO Greg Garrabrants said the company took a $15.3 million loss provision related to a single clearing client from a small broker-dealer (which has since discontinued trading activity).

Between the expenses related to that event, and other nonrecurring items related to acquisitions closed in the quarter, Axos' net income was reduced $12.7 million, or $0.21 per share.

Now what

On one hand, it's a pretty bad look when a business you just acquired immediately slaps you with a potential $15 million loss right out of the gate. On the other, Axos' track record on these kinds of deals has generally been quite good. And management says it has used this event both to prevent this sort of event from occurring again, and to improve its internal risk systems.

Moreover, Axos' overall business continues to deliver strong results. Net interest and non-interest income increased 10.7% and 10.9% respectively, while net interest margin improved to 4.82%, and a strong 4.94% in the banking business. Lastly, book value increased 15.2% to $16.88 per share. Put it all together, and Axos' banking business continues to deliver solid growth and earnings potential.

Investors shouldn't ignore the impact of one-time expenses -- particularly the potential losses related to the clearing business -- or dismiss them completely out of hand. But I think it's fair to give Garrabrants and his team time to address the reason, recover whatever they can from the individual and broker responsible, and to implement better risk systems in the clearing business.

Is today's sell-off an overreaction? I think it's probably a little overdone, and the quality of Axos' banking business and history of execution point to this as being a nice opportunity to buy shares.

AX Price to Book Value Chart

AX Price to Book Value data by YCharts.

The stock has been trading at less than 1.8 times book value, and about 12 times trailing earnings. Compared to what the market has been willing to pay in the past, that's solid value.

Jason Hall owns shares of Axos Financial, Inc. The Motley Fool owns shares of and recommends Axos Financial, Inc. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Axos Financial Stock Quote
Axos Financial
$37.39 (-0.61%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.