Axos Financial: When Quality Deserves A Premium

Investment Thesis - Axos Financial has demonstrated strong performance with double-digit earnings and book value growth for the fiscal fourth quarter of 2024, suggesting a premium valuation is warranted compared to the sector median [2][4] - The stock is currently trading at a discount of 8.7x forward earnings, indicating potential for upside [2] Company Overview - Axos Financial is a diversified financial services company with approximately $22.6 billion in assets and $35.0 billion in assets under custody, comprising Axos Bank, Axos Clearing LLC, and Axos Invest [3] - Axos Bank offers consumer and commercial banking products through digital platforms, while Axos Clearing LLC serves as a full-service clearing firm, and Axos Invest provides digital investment advisory services [3] - The company has shown resilience during economically volatile times, with net interest income increasing from $477.6 million to $961.4 million over the past TTM [3] Performance Metrics - The return on average shareholder equity for the last twelve months ended June 30, 2024, was 21.6%, significantly higher than the sector median of 10% [4][5] - Axos Financial achieved a 26% year-over-year growth in tangible book value per share, with total non-performing loans decreasing by $9 million linked quarter [5] Management Quality - The quality of management at Axos Bank is a key factor in its outperformance, demonstrating competence in market trends, loan origination, and deposit management [6] - The capital to risk-weighted assets ratio was 13.80% as of June 30, 2024, indicating strong capital adequacy and prudent risk management [6] Commercial Real Estate (CRE) Loans - Axos Financial's CRE loans are primarily in multifamily properties, with a weighted average loan-to-value (LTV) ratio of 40%, reflecting prudent risk management [7] - The company has reduced exposure to certain CRE sectors, preparing for potential economic downturns, with multifamily loans remaining attractive due to ongoing rental demand [7] Valuation - The estimated fair value of Axos Financial's stock is $90, based on a projected 15% annual growth rate in book value and earnings, applying a premium earnings multiple of 11.5x [8] - The stock is considered remarkably cheap given its strong growth and profitability profile, with management actively buying back shares at a significant discount [8]