BofI Holding (NYSE:AX) has been growing like crazy for the past several years, but its stock price barely budged in in 2014, finishing the year up about 2%.
OK, it's not fair to say it "barely budged," considering that it was up 40% in late March, before falling 38% by October. The stock is up again, more than 28% since, but however you slice it, it's hard to know whether there's value, based on the stock price.
The reality is, stock price isn't the best metric to measure the results of the business. With earnings for the second quarter set to be released on Jan. 29, let's take a closer look at three other metrics and talk about why they're important to BofI Holding -- and, even more importantly, why they matter to shareholders.
Using the right tool for the job
No business is worth buying at just any price, but it's important to know the difference between price and value. With this in mind, there are a number of different metrics you can use to measure the tangible growth -- or loss -- of a stock's value. A common ratio used to measure the valuation of a financial stock like that of BofI Holding is the price to tangible book value ratio. This measure takes the share price of a stock and divides it into the tangible book value -- essentially the company's balance sheet assets, minus intangibles such as patents and "goodwill."
The resulting ratio can then be compared with that of similar companies to get a better idea of the value that the share price represents. Here's how this ratio has changed for BofI Holding since January 2014:
Even though the stock is up 11% during the past year, it's "cheaper" today than it was one year ago. But it's also way more "expensive" than the typical bank stock:
However, premium growth comes at a price. With a market capitalization less than $1.3 billion, BofI could grow 10 times larger and still be only 25% the size of Capital One Financial (NYSE:COF), easily the smallest of the banks listed in the preceding graph. While that may not put the current share price in "value investor" territory, it's not necessarily too expensive for the likely rate of growth over the next five to 10 years.
The driver of BofI Holding's income is loans, but without adequate deposits, Bank of Internet can't make any, so it's important for the company to continue growing its deposit base. The company is doing just that, both through organic new customer growth and acquisition of accounts. Through last quarter, total deposits were $3.26 billion, a 50% increase from $2.19 billion the year prior. In December, BofI announced that it had acquired $125 million in money market accounts from Union Federal Savings Bank, further adding to its deposit base.
But there's another tool in BofI Holding's belt for funding, and it's one that can kill an investment: secondary share offerings. If management uses share offerings in ways that don't increase per-share returns, it's bad for existing shareholders. We'll take a closer look in the next section.
Per-share earnings growth
It may seem obvious, but earnings growth -- measured per share -- is a critically important metric for BofI investors. The reason it's even more important to watch? Shareholder dilution through secondary offerings. BofI Holding has used -- and is likely to use -- secondary stock offerings to raise capital to fund loans with.
On the surface, this dilution may look bad -- and if the proceeds aren't properly used, it could be -- but the reality is, if the company is able to generate per-share profits in excess of the cost of the dilution, it's actually shareholder-friendly. So how well has BofI Holding management used this funding mechanism?
While net income has exploded, earnings per share have grown at a much lower rate. However, EPS have increased at a higher rate than the share count, indicating that dilution hasn't harmed existing shareholders.
Over time, the company's deposits will hopefully reduce this dilution, but in the interim, it's a reality to deal with. As long as management is able to grow per-share income as a result, it's a net win.
While this earnings preview doesn't have any bold predictions, it should help you better understand what all the earnings info means and to drill down to some of the most important metrics. These aren't the only three things that matter, but they should make it a little easier to digest the company's earnings release, and look for improving or weakening trends over the long term.
Want to see more when earnings come out? Tune in here on Jan. 29 for a recap of last quarter's results.