Analysts Love This Stock; Are They Right?

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When a stock gets the overwhelming backing of the analyst community, it is usually considered a strong buy. That would describe Axos Financial (NYSE:AX), the holding company for one of the leading pure-play online banks, Axos Bank.

Among the analysts who cover Axos stock, the average price target for the next 12 months is $67.50, which would be 37% higher than the current price of $51.28, as of March 6. Even the low end of the range at $62 per share calls for a 21% return, while the high end at $77 per share would result in a 50% gain.

Why are analysts so bullish on this stock?

The granddaddy of online banks

Axos started as the Bank of the Internet in 1999, making it one of the first online banks. Over the years, its name changed to Axos, but it remains one of the largest and most well-known banks that operates almost entirely online, as it has only a few physical branches.

As Axos has fewer physical buildings, it also has lower overhead costs. This, along with good management, allows the bank to operate extremely efficiently.

A key metric for banks is the efficiency ratio, which gauges how much a bank spends for every dollar it earns. In its fiscal second quarter, which ended on Dec. 31, Axos had a ridiculously low overall efficiency ratio of 34%, which is one of the lowest you will find. That’s down from 47% in the same quarter a year ago.

Just in the banking segment, Axos’ efficiency ratio is 31%, down from 46% a year ago. The lower the efficiency ratio, the more efficiently the bank operates, and for most banks, a ratio in the 50% range is considered good.

This level of efficiency, combined with a record quarter with $152 million in net income or $2.62 per share, creates huge margins and lots of cash flow. In its fiscal Q2, Axos actually increased its net interest margin (NIM) to 4.55% from 4.49% in the same quarter a year ago.

Most banks have seen their NIMs drop because they are paying out more interest on deposits. However, Axos has managed to keep its deposit rates lower in this competitive environment and still attract more deposits. In the most recent quarter, Axos had $18.2 billion in deposits, up $1.1 billion from June 30 and $2.5 billion from Dec. 31, 2022.

How is it able to pull this off? While Axos’ savings account yields are lower than the average, it does offer a competitive but lower checking account interest rate, while many banks don’t offer any interest on checking accounts.

This all results in high operating margins, lots of liquidity, and an abundance of cash to invest in its growth and withstand difficult market conditions. Specifically, Axos has a ridiculously high operating margin of 52%, a robust 21% return on equity, and $1.7 billion in cash compared to $749 million in debt.

Are the analysts right?

Axos Financial’s strong balance sheet and high efficiency give it a leg up on most banks in terms of generating profits. It also has solid credit quality, as its net charge-off ratio, or the percentage of loans that the bank likely won’t recover, went down in the recent quarter.

When delinquencies and charge-offs are expected to be higher, it can lead to higher provisions for credit losses, which banks must set aside to cover potential losses. This can result in a drag on earnings. However, Axos has kept its provisions relatively manageable due to its solid credit quality, and even if it sees a spike, it has the higher margins and cash to handle them.

Banks typically don’t do as well in slowing or down economies, which may account for the fact that Axos’ stock price is down about 7% year to date. However, that has kept this excellent stock at a reasonable or even low valuation, trading at just 7 times forward earnings, down from about 10 at the start of the year. In fact, the economy has been more resilient than expected and with rates anticipated to come down in the second half of the year, the economy could get a jolt. That would be good for banks in general, including Axos.

This is really a good stock, and to get it at this valuation is even better. I’d say the analysts are right on their bullish view of Axos Financial.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.