This is my second analysis, and in order to make myself known, I am leaving it open.
Summary
Name: NewtekOne, Inc.
Ticker symbol: NEWT
52 Week Range: 10.75 - 25.55
Market Cap: 305.393M
Selected Data
Price/Book (mrq): 0.72
Average Daily Volume (10 day): 229.02k
Shares Outstanding: 24.61M
Data as at close of trading on 24 May 2023
Business Description of How The Company Used to Be
Newtek Business Services Corp. was a Maryland corporation which was formed in August 2013 and was an internally managed, closed end, non-diversified investment company. The Company’s investment strategy was to maximize the investment portfolio’s return by generating current income from the debt investments the Company makes and generate dividend income from equity investments in controlled portfolio companies. On August 2, 2021, the Company entered into the Stock Purchase Agreement with NBNYC and certain NBNYC shareholders to acquire all of the issued and outstanding stock of NBNYC (the “Acquisition”). Subject to certain regulatory approvals (the “Regulatory Approvals”), the Acquisition was part of the Company's plan to reposition itself as a bank holding company that intends to elect financial holding company status. In connection with this plan, on June 1, 2022, at a special meeting of Company shareholders, the Company received its shareholders’ approval to discontinue the Company's election as a business development company, as required under the 1940; however, the Company’s Board did not seek to discontinue the Company’s election as a BDC under the 1940 Act until after the Company received the required regulatory approvals for the Acquisition and after certain of the Acquisition closing conditions were met. The final decision on the timing of the Company’s discontinuance from regulation as a BDC was going to be made by the Board based on such factors deemed appropriate by the Board, including the
then current status of the Acquisition and discussions with applicable regulatory authorities. After the Company’s discontinuance from regulation as a BDC, the Company will no longer be subject to the regulatory provisions of the 1940 Act applicable to BDCs, will no longer qualify as a RIC, and therefore will be treated differently from both a tax and regulatory perspective. Newtek estimated at the time that it would maintain its status as a BDC and RIC in the near term, and therefore expected to maintain its current dividend policy with the objective of making quarterly distributions in an amount that approximates 90 - 100% of the Company's annual taxable income. (I've italicized where I've changed the present tense to the past tense.)
Business Description of How The Company is Now
The Company is a financial holding company that is a leading business and financial solutions provider to SMBs and provides SMBs with the following Newtek® branded business and financial solutions: Newtek Bank, Newtek Lending, Newtek Payments, Newtek Insurance, Newtek Payroll and Newtek Technology.
On January 6, 2023, the Company completed the Acquisition of NBNYC, a national bank regulated and supervised by the OCC, pursuant to which the Company acquired from the NBNYC shareholders all of the issued and outstanding stock of NBNYC for $20 million, plus reimbursement of certain expenses. NBNYC has been renamed Newtek Bank, National Association and has become a wholly owned subsidiary of the Company.
In addition, on January 6, 2023, the Company filed with the SEC a Form N-54C, Notification of Withdrawal of Election to be Subject to the 1940 Act, and has ceased to be a BDC effective as of January 6, 2023. As a result of the foregoing, the Company is now a financial holding company, no longer qualifies as a regulated investment
company (RIC) for federal income tax purposes, and no longer qualifies for accounting treatment as an investment company.
Cognitive dissonance, a.k.a. why is this company undervalued?
Are you still with me? The boilerplates above are taken from the latest Forms 10-Q and are written in cold, bureaucratic language. I asked you to make an effort, but it was necessary.
First mismatch: NEWT is no longer a BDC. However, in some lists, it is still described as such. Investors in search of a high dividend yield have been sellers of the stock in recent months. Financial sites still indicate a dividend yield of 18.98%. Please refer to the “Forward Dividend & Yield” section below.
NewtekOne paid a dividend of $0.18 on 04/03/2023. This dividend represents an annualized yield of 5.80% on the closing share price on 24 May.
Angry, perhaps surprised, investors have become sellers of the name. Econ 101 says that if there are more people selling than there are people buying, the price will go down.
Second mismatch: NewtekOne is now a bank and as such has been caught up in the general sell-off that has hit the industry recently. Many investors have sold to be safe. But is it really a bank like any other? Is it at risk?
I refer to the press release dated 9 May 2023, NewtekOne, Inc. Reports First Quarter 2023 Net Income of $11.7 million, or $0.46 per Basic Share (Source: https://investor.newtekbusinessservices.com/news-releases/news-release-details/update-newtekone-inc-reports-first-quarter-2023-net-income-117).
I would just like to mention this key point:
Barry Sloane, President, Chairman and CEO commented, “We are pleased to report our first quarter 2023 financial results - our first quarterly report as a financial holding company that owns Newtek Bank, a nationally chartered technology-enabled bank. Despite extremely volatile industry and market conditions in the first quarter of 2023, the Company was able to successfully navigate its business plan and model. We delivered basic earnings per share of $0.46, which exceeded our previous forecast of $0.41. We are reiterating our previously issued earnings forecast for the full year 2023 in a range of $1.70 per share to $2.00 per share. We are particularly proud to have been able to accomplish all of this at a time when financial institutions were losing deposits, facing difficulties with asset and liability management and pressure on their net interest margins. We believe that our first quarter 2023 results help demonstrate that the problems that are currently plaguing the banking industry do not exist within our business model and strategic plan. Credit risk and duration risk are exceptionally well managed in our business model and strategy, and we look forward to explaining this in detail during our earnings conference call tomorrow morning.
To sum up:
The bank is performing well and generating profits
Estimated earnings for the full year 2023 are in the range of $1.70 to $2.00 per share.
The Company is immune to the problems that are currently plaguing the banking industry.
Investment Thesis
The bank is currently valued at between 6.2 and 7.3 times expected 2023 earnings per share. In other words, I think it's undervalued.
In the investor presentation Update on NewtekOne, Inc.'s Financial and Operational Performance as a Financial Holding Company (on 15 March 2023), on page 4, NewtekOne
reconfirmed its recent guidance of $1.70 - $2.00 earnings per share for
2023 and $2.80 - $3.20 per share in 2024 despite turbulent market conditions which
we do not believe are affecting our business model.
The above average would imply a P/E ratio of 4 in 2024. Although this guidance was not reiterated in the subsequent investor presentation (Company Earnings, 9 May 2023), I think it is indicative of the earnings power of this bank.
(Source: https://investor.newtekbusinessservices.com/static-files/272abd05-32ec-4f46-a079-6c2470f9b9e0)
In my view, this is a cheap valuation.
On 17 May 2023, both Barry Sloane, Chief Executive Officer, and Gregory Zink, Director, purchased shares in the Company. Barry Sloane purchased 5,000 shares and Gregory Zink purchased 500 shares. They invested $56,400 and $5,700 respectively. (Edited on 06/06/2023 to correct a typo. 17 May 2023, not 17 May 2002. Newsletters that have been sent cannot be corrected).
(Sources: https://investor.newtekbusinessservices.com/static-files/510637b9-7a35-474f-ae30-942ab8a5e299 and https://investor.newtekbusinessservices.com/static-files/c997850e-ad9b-4d77-bc99-6c71b9bb0566)
As famous investor Peter Lynch said, insiders might sell a stock for many reasons, but they only buy for one: they think the stock will go up.
Catalysts
I really don't think there are any catalysts that are going to suddenly revalue the price of this company. Instead, I believe that there will be a gradual change in investor sentiment towards the banking sector as a whole, and in particular, the current difficult situation will differentiate the well-run banks from those that are not - NewtekOne is a well-run bank.
Meanwhile, we collect the dividend, which I believe is respectable at current share prices and in anticipation of earnings and dividend growth over the coming years.
Technical Scorecard
At the time of writing, NEWT is trading well below its 200 SMA but has recently broken above its 50 SMA.
RSI (14) is 57.38
Portfolio Performance
I will mark today's closing price as the purchase price. I will mark a purchase value of $10,000.
Updates will compare the performance against the S&P 500.
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