Revenue Diversification And Operating Leverage Improvements Will Strengthen Future Financial Stability

Key Takeaways

• Strategic expansion in loan portfolio and balance sheet management strengthens financial foundation and future growth potential.
  
• Revenue diversification and improved operating leverage expected to boost earnings and net margins.
  
• Rising non-performing loans and CRE concentration pose credit risks, while merger costs and deposit reliance could pressure margins and increase compliance expenses.

Catalysts

Operates as the bank holding company for b1BANK that provides various banking products and services in Louisiana and Texas.

• Business First Bancshares is showing improved operating leverage through the expansion of net interest margin and expense control, which is expected to positively impact net margins and earnings.
  
• Continued diversification of revenue streams, including asset management, SBA loan services, and an internal swap desk, is anticipated to increase noninterest income, thereby supporting future revenue growth.
  
• Strategic management of the balance sheet, with deposits growing faster than loans, is leading to higher capital levels and tangible book value growth, contributing to a stronger financial foundation.
  
• The successful acquisition and integration of the Oakwood transaction, increasing exposure in the Dallas and Houston markets, is expected to add value to the loan portfolio, contributing to future earnings growth.
  
• Anticipated decline in deposit costs and opportunities for loan re-pricing in a potentially easing interest rate environment suggest improved net interest margins, which would enhance earnings.

Business First Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Business First Bancshares's revenue will grow by 14.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.6% today to 27.1% in 3 years time.
• Analysts expect earnings to reach $101.0 million (and earnings per share of $3.21) by about December 2027, up from $59.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2027 earnings, down from 13.5x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 2.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.23%, as per the Simply Wall St company report.

Business First Bancshares Future Earnings Per Share Growth

Risks

• The increase in non-performing loans (NPLs) and special mention loans may indicate potential credit quality issues, which could affect earnings and increase the need for provisions for loan losses.
  
• A significant portion of loan growth is concentrated in the commercial real estate (CRE) and construction and development (C&D) portfolios. A downturn in these sectors could impact revenue and margins.
  
• The reduction in non-interest-bearing deposits and reliance on interest-bearing deposits for growth could increase funding costs and pressure net interest margin (NIM).
  
• The transition and integration costs related to the Oakwood merger, including future expected core conversion expenses, could inflate non-interest expenses and impact net margins in the near term.
  
• Potential risks with the expansion strategy, including regulatory challenges as they approach the $10 billion asset threshold, could result in increased compliance costs and hinder profitability.

Valuation

• The analysts have a consensus price target of $33.25 for Business First Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $372.2 million, earnings will come to $101.0 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of $27.02, the analyst's price target of $33.25 is 18.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.