Navigating the Complexities of NewtekOne: A Comprehensive Analysis

NewtekOne, Inc. (NASDAQ:NEWT) has garnered a loyal following, but our coverage of the stock has been less than enthusiastic. Out of the last 8 ratings we have generated for the company, 1 has been a Sell and 7 have been a Hold. In our previous coverage, we highlighted the key risks for the company and decided to stay on the sidelines, primarily due to concerns over the leverage in the new model and its potential performance during the next economic downturn.

Uncovering the Nuances of NewtekOne's Financial Landscape

Navigating the Earnings Landscape

The second quarter of 2024 was a relatively uneventful period for NewtekOne, with earnings coming in as expected and the company maintaining its full-year guidance of $1.85-$2.05. One interesting aspect of NEWT's earnings is the relative stability of its net interest margin, which stands in contrast to the experiences of many regional banks that are grappling with the challenges of higher payments for CDs and savings accounts, coupled with long-end compression that is putting downward pressure on their interest payments.

Examining the Income Streams

A closer look at NewtekOne's income structure reveals that the company's "gain-on-sale" has been a consistent driver of its outsized return profile. However, it's important to note that this revenue stream is not entirely free, as there are significant noninterest expenses associated with it. For instance, the electronic payment processing income of $12.64 million was accompanied by expenses of $5.69 million, with the revenue expanding at a 15% clip while expenses grew by 17% in this category. This highlights the level of effort required to generate the net income of 43 cents per share.

Assessing the Valuation and Risks

At first glance, NewtekOne appears to be a bargain, trading at less than 6 times earnings and offering a dividend yield of around 6.5%. However, the key question is how the company's performance will hold up during the next economic downturn. The company claims to have experience navigating various tough environments, but there is little visibility into how its current model will fare in a recessionary setting. The leverage ratios are significantly lower than those of other banks, which could be a double-edged sword, as the credit markets seem somewhat unsure of the company's prospects.

Exploring the Baby Bond Landscape

NewtekOne has several baby bonds trading on the exchanges, including the NEWTZ, NEWTG, and the newly introduced NEWTH. These bonds offer significantly higher yields than the common stock, with the NEWTZ currently yielding around 8.5% to maturity over the next 1.5 years. The NEWTG, in particular, stands out as it offers a wider spread to risk-free rates than what might be expected, with a stripped yield of close to 8.6%. This suggests that the market remains cautious about NewtekOne's prospects, and the baby bonds may provide a safer way to participate in the company's story through the next recession.

Navigating the Challenges Ahead

While NewtekOne's valuation and dividend yield may be enticing, the company's decision to abandon its BDC model and the lack of visibility into its performance during a downturn remain significant concerns. The leverage ratios and the credit market's uncertainty about the company's prospects add to the overall risk profile. As such, we remain skeptical about the company's ability to navigate the challenges ahead and will need to see evidence of successful management of a recessionary environment before considering a more bullish stance on the stock.