Initiatives In Renewable Energy And Embedded Finance Will Diversify Revenue Streams

Key Takeaways

• Strategic asset reallocation and partnerships in renewable energy are poised to enhance revenue growth and net interest margin through efficient resource allocation.
  
• Diversification through credit sponsorships and Partner Solutions expansion boosts revenue streams and stability, augmented by share repurchases for EPS growth.
  
• Sale of the insurance premium finance business and rising costs could compress margins, making Pathward Financial more dependent on fewer income sources.

Catalysts

Operates as the bank holding company for Pathward, National Association that provides various banking products and services in the United States.

• The sale of Pathward Financial's insurance premium finance business and securities has freed up $800 million on the balance sheet, which can now be reallocated into higher-yielding assets or those offering optionality. This strategy is expected to enhance net interest income and expand the net interest margin over time.
  
• Entering into a strategic partnership for renewable energy loan growth allows Pathward to underwrite high-risk-adjusted return loans and offers balance sheet velocity. This initiative is expected to contribute to revenue growth and potentially improve net margins through more efficient resource allocation in the renewable energy sector.
  
• The expansion of credit sponsorships, where Pathward acts as a lender of record with protective credit layers, provides additional balance sheet flexibility and optionality. This is anticipated to drive net interest income growth and diversify revenue streams.
  
• Pathward's proactive strategy to grow their Partner Solutions segment, which primarily generates noninterest income, is driven by the increased demand for embedded finance and fintech collaboration. This diversification is critical for enhancing revenue stability and growth.
  
• Share repurchases, supported by the liquidity from asset sales, are indicative of a drive to enhance earnings per share (EPS) by reducing the number of outstanding shares, which can be a catalyst for stock valuation growth.

Pathward Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pathward Financial's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.7% today to 21.2% in 3 years time.
• Analysts expect earnings to reach $201.4 million (and earnings per share of $9.66) by about January 2028, up from $170.7 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 10.1x on those 2028 earnings, down from 10.9x today. This future PE is lower than the current PE for the US Banks industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 4.74% 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.

Pathward Financial Future Earnings Per Share Growth

Risks

• The sale of the insurance premium finance business may limit Pathward Financial's revenue streams, creating dependency on fewer income sources which could impact overall earnings.
  
• Potential political shifts could slow momentum in renewable energy investments, reducing future revenue growth from that sector.
  
• Increased pressure on contractual rate-related processing fees could constrain margins, negatively affecting net income.
  
• Higher compensation and benefits costs, due to talent acquisition for technology initiatives, may inflate noninterest expenses, compressing net margins.
  
• Regulatory pressures in the banking-as-a-service sector might lead to compliance-related costs and impact earnings if partnerships do not adequately grow revenue.

Valuation

• The analysts have a consensus price target of $86.0 for Pathward Financial 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 $949.6 million, earnings will come to $201.4 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $77.31, the analyst's price target of $86.0 is 10.1% 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.