Axos Financial's (AX 0.45%) stock price has spiked in the past couple of weeks, and it has jumped over 11% in the last five trading days. That recent performance means the stock is down only about 15% year to date as of Oct. 7.
What has sparked this surge?
It was likely due to the return of discussion about a second round of stimulus, although those talks seem to go hot and cold daily based on the latest feelings from President Donald Trump. A tweet from the president on Monday that talks would be pushed off until after the election caused bank stocks to drop. Roughly 24 hours later market traders got hopeful that something will happen after Trump changed course and said he's open to getting a partial stimulus deal done.
While a new stimulus package in any form would be good for bank stocks in general and Axos in particular, it's more important to look at long-term trends when assessing a stock. In the case of Axos, an online bank, the long-term trends look very promising.
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Highly efficient operation
Axos Financial is an entirely digital bank with about $12 billion in assets. It started in 2000 as the Bank of Internet USA and was one of the first online banks. With no physical branches, it maintains a very low overhead, which has helped it during the coronavirus pandemic. In its fiscal 2020 fourth quarter (which ended June 30), Axos posted earnings of $45.3 million, which is up 11.5% from the fourth quarter of 2019. To further show its resiliency, the company saw net income rise 18% year over year to $183 million for the full fiscal year -- a time period that includes two quarters of the pandemic.
The steady earnings and low expenses make Axos more efficient than most of its peers. Its efficiency ratio -- a measure of expenses relative to earnings -- at the end of the last quarter was 49.1%, which is down from 51% a year ago. The efficiency ratio just for Axos' banking business is an even better 41%, which is down from 43% year over year. An efficiency ratio below 50% is considered optimal.
High-quality loans
In addition to its efficiency, Axos has a comparatively high-quality loan portfolio as the bank is primarily a lender of single-family and multifamily mortgages with 40% for the former and 18% for the latter. Record low interest rates drove demand for refinancings and purchases, which helped grow the loan portfolio by 13% year over year to $1.25 billion.
The average loan-to-value (LTV) ratio on its single-family loans was 60% at the end of the most recent quarter. The LTV measures the amount borrowed relative to the overall value of the asset, so a lower LTV means less has to be paid back. When less is outstanding, there is less risk of default. Similarly, the average LTV ratio for multifamily mortgages was 56% and for small commercial loans it was 52%. These are all relatively low numbers, as an LTV ratio under 80% is considered good.
On the fourth-quarter earnings call, Axos president and CEO Gregory Garrabrants said about 94% of the company's loans had an LTV ratio in the 50s. This high-quality loan portfolio is a main reason why Axos had a relatively low provision for potential credit losses -- $6.5 million in the quarter. Many other banks saw their earnings crushed by the need to maintain high provisions.
Good value
Axos is a good buy right now. Its pipeline for single-family mortgages is robust, given that demand has picked up as the economy has improved. And economists expect the housing market to remain strong in 2021 as interest rates stay low. In addition, as the pandemic has accelerated the shift to e-commerce, Axos should be able to take advantage of its position as an online banking pioneer with a great track record of success.
What really makes this bank stand out is its value. The bank has an extremely low price-to-earnings ratio of about eight, and, more importantly, a price-to-book (P/B) ratio of about 1.15. The P/B measures the value of the bank's assets versus its stock price, so a P/B of 1.15 means that the stock is trading pretty low relative to its assets on the books.
The stock price is likely deflated due to guilt by association with the beaten-down banking sector, but for value investors, that's good because it means you can get this stock at a good price.
