Loan Expansion And Share Buybacks Will Strengthen Future Prospects

Key Takeaways

• Strong loan growth across several segments and noninterest income initiatives are expected to diversify revenue and enhance the company's financial position.
  
• Share buybacks and dividend increases reflect management's confidence, boosting future earnings per share and signaling a sound investment outlook.
  
• Higher credit loss provisions and operational expenses may pressure margins, while business segment sales and deposit management challenges could affect revenue and earnings.

Catalysts

Through its subsidiaries, provides various retail, mortgage, and commercial banking products and services in Puerto Rico, the United States, and the British Virgin Islands.

• Strong loan growth in 2024 across most business segments, particularly in commercial, construction, auto, and mortgage loans, driven by the stable Puerto Rican economy and diversified product offerings. This is expected to boost future revenue.
  
• Resumption of share buybacks with a significant $500 million authorization, along with an increased quarterly dividend, signaling management's confidence in the stock and contributing to higher future earnings per share (EPS).
  
• Noninterest income growth initiatives, including increasing fee income from commercial clients, credit card activities, and other services, are expected to bolster future revenue streams despite the sale of a non-core business.
  
• Anticipated net interest margin (NIM) expansion in 2025, driven by the continued reinvestment of lower-yielding securities into higher-yielding U.S. treasury notes, and lower deposit costs are expected to enhance net interest income.
  
• Ongoing federal fund disbursements for infrastructure rebuilding in Puerto Rico, including the electricity grid and housing, are poised to support sustained economic activity and, hence, further loan growth and revenue for the bank.

Popular Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Popular's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.9% today to 23.0% in 3 years time.
• Analysts expect earnings to reach $852.2 million (and earnings per share of $13.6) by about January 2028, up from $614.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, down from 11.9x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 4.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Popular Future Earnings Per Share Growth

Risks

• Higher provision for credit losses indicates potential concerns about future credit quality, which could impact net margins and earnings.
  
• Increased operating expenses due to professional fees, promotional efforts, and personnel costs may reduce net margins.
  
• Sale of a non-strategic business segment like the car rental operation could result in a reduction in noninterest income, potentially affecting overall revenue and earnings capabilities.
  
• Concerns about the ability to maintain deposit costs and manage deposit outflows could impact net interest margin expansion and revenue.
  
• Challenges in maintaining or enhancing credit card portfolio performance, given the increases in delinquencies and net charge-offs, might affect revenue and profit margins.

Valuation

• The analysts have a consensus price target of $109.56 for Popular 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 2028, revenues will be $3.7 billion, earnings will come to $852.2 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $102.46, the analyst's price target of $109.56 is 6.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.