Finance of America: Valuations Remain Low Despite Recent Performance

Finance of America Companies' valuation is considered cheap, with a growing end market and good execution. The company's 1Q25 results were positive, leading to a buy rating. The long-term outlook for the company is hard to ignore despite the need for moderation in near-term expectations.

Finance of America Companies (NYSE: FOA) has been a subject of interest for investors, particularly given its cheap valuation, growing end market, and strong execution. The company's 1Q25 results were positive, leading to a buy rating. However, recent quarters have shown a stabilization in operations, with expectations needing moderation in the near term.

In the second quarter of 2025, FOA reported upbeat results, with a funded volume of $602 million, growing 35% year-over-year and beating its own guidance of $575-600 million. This growth was driven by healthy loan submission growth, with the overall submissions for the quarter growing by a rapid ~11% quarter-over-quarter. The company's proprietary HomeSafe Second product, designed for senior homeowners to tap into home equity without refinancing, saw a surge in submissions of almost 23% sequentially. Additionally, FOA's wholesale channel delivered remarkable ~55% growth year-over-year, driven by the strength of its third-party originator network.

On the expense front, total expenses increased by ~14% year-over-year to $95 million, compared to a 35% growth in funded volume and a remarkable 124% surge in total revenue to $177 million. This resulted in a significant improvement in basic EPS, from a loss of $0.20 in 2Q24 to a $3.16 gain in 2Q25. The company's balance sheet also showed improvement, with tangible equity growing by 47% quarter-over-quarter to $275 million. Furthermore, FOA aggressively securitized $800 million worth of loans during the quarter, with the securitized loan amount reaching ~$1.2 billion by July.

The company's long-term prospects remain appealing, with the reverse mortgage market being underpenetrated and ripe for growth. The US is experiencing a significant demographic change, with the 65-and-over population expected to grow significantly in the coming decades. This population holds ~$14 trillion worth of home equity but faces a savings gap of an estimated $3.68 trillion. FOA, being an industry leader in the reverse mortgage market, stands to benefit from this trend.

From a valuation standpoint, FOA remains attractively priced. Management estimates the company can deliver adjusted EPS of ~$2.6 to $3.0 in 2025, giving a forward non-GAAP PE ratio of 8.7x-10x. This high single-digit PE ratio is lucrative due to the company's turnaround status and potential for EPS growth.

However, investors should moderate their expectations in the near term. The company's business is becoming more stable, and low-hanging fruits have largely been reaped. While the company has a history of beating guidance, the margin of beat has been shrinking over time. Therefore, investors should expect steady performance rather than big surprises.

In conclusion, while recent results were good, near-term expectations need to be moderated. Long-term outlook remains positive, and the company is trading at a lucrative valuation. Given this, the buy rating on the stock is reiterated.