Axos Financial (NYSE:AX) reported solid fiscal second-quarter results on Jan. 29. Both non-interest and interest income increased by double-digit percentages, earnings per share jumped 8%, and asset growth of 25% helped position the online banking and financial services provider for even more growth.
Yet the market continues to look past Axos Financial. Since the report was released, the bank's shares have lost about 2% of their value; over the past year, its stock price is down by a double-digit percentage. As such, Axos has underperformed the S&P 500 (SNPINDEX: ^GSPC), other financial stocks, and both the Russell 2000 (RUSSELLINDICES: ^RUT)and S&P Small-Cap 600, two growth-stock indexes of which Axos is a component.
Yet a review of Axos' latest results paints it in a different light, showing a high-quality business that continues to deliver solid growth and grow more diversified. For investors willing to take a position that's contrary to the market's over recent years, there are three reasons in particular that Axos looks like a stock to buy.
1. It's efficiency ratio: Lower is better
One of the more important metrics to use when evaluating bank stocks is efficiency ratio -- defined as the percentage of a bank's revenue that it spends on operations. The lower the ratio, the more efficient the bank. Axos' efficiency ratio for the first six months of the fiscal year was 52.04%, meaning it spent just over 52 cents of every dollar in revenue it generated to fund operations. For context, most commercial banks have efficiency ratios of more than 60% -- sometimes much more.
Over the past couple of years, Axos' efficiency ratio has increased. Considered out of context, that would be viewed as "bad," since a growing bank should see its efficiency ratio fall, as larger scale should translate into more efficient operations. The catch here is that the bulk of Axos' increased efficiency ratio was tied to a handful of acquisitions that inflated the metric in an outsize way as compared to its core banking business.
To help provide a more accurate view, Axos reports its consolidated efficiency ratio, but also breaks out the efficiency ratio of just its banking business. And as CEO Greg Garrabrants pointed out on the fiscal second-quarter earnings call, Axos' bank-only efficiency ratio was 43.9% in the first half of the fiscal year.
Let's take it one step further. By just about any measure against any other bank, Axos' efficiency ratio is excellent. Even with its consolidated efficiency ratio impacted by its capital-intensive clearing business, it is still more efficient than some of the best-run banks in the world, including JPMorgan Chase (NYSE:JPM), which had a 55% expense ratio last quarter. Even better, Axos' efficiency ratio is improving -- it dropped from the first quarter to the second.
2. Its loan-to-value ratio says Axos is safer than you think
Axos often gets dinged by investors who are concerned that it's high risk. This is in part due to misconceptions about its branchless business model (it doesn't operate any physical retail bank locations) and concerns that too much of its loan portfolio is in high-balance jumbo mortgages. Moreover, management's steps to build a more diversified business have included growing both commercial and industrial (C&I) lending and auto loans. These new sources of growth also increase its exposure to a potential economic downturn.
Here's the catch: Even with those potential "risks" (both real and perceived), Axos has one of the lower-risk real estate loan portfolios out there. At the end of the second quarter, the weighted average loan-to-value ratio (LTV) on its entire real estate loan book was 55%. That means every $1.1 million Axos has in real estate loans is secured by real estate worth $2 million, on average.
That's a wide margin of safety that would well protect the bank -- and its investors -- against a permanent loss of capital. It's also similar to the kind of real estate loan portfolio investors find at Wells Fargo (NYSE:WFC), which -- despite recent struggles -- is well-regarded for the quality of its real estate lending.
3. Its tangible book value keeps growing
Tangible book value measures the financial value of a company's assets. That metric is particularly important for banks, because their values are largely underpinned by the values of assets like loans and cash that they hold, minus liabilities like deposits. Any premium the market gives them to that tangible book value will relate to their ability to grow, to operate more profitably than their peers, or to the relative safety of their assets, which can help them ride out economic downturns.
Over the past three years, Axos' tangible book value is up 29%, and up 33% on a per-share basis due to stock repurchases. For comparison, JPMorgan's tangible book value increased by 3%, or 19% per share, over the same period.
Here's the rub: Though it has grown its book value by a third, Axos' stock price is 3% lower than it was three years ago.
The numbers tell a compelling story
One look at Axos' stock chart for the past three years would probably be enough to send plenty of investors looking elsewhere. However, I think the numbers should lead to a very different conclusion: Axos is a high-quality business that continues to deliver growth, operate profitably, and is probably a safer investment than you think.
Best of all, it's also gotten cheaper. Shares trade for a similar price today as they did three years ago, while earnings and tangible book value are up 28% and 33% respectively. Whether you're looking for a great growth stock or a high-quality bank stock, the math doesn't lie: Axos Financial is an excellent business that's worth buying now.