Expanding Into Southeast Wisconsin And Kansas City Will Support Future Revenue Diversification

Key Takeaways

• Strategic investments and team expansions in key markets, alongside focus on deposit generation and treasury management, drive revenue and earnings growth.
  
• Enhanced SBA lending production and private wealth management diversification support stable or improved net margins and healthier earnings growth.
  
• Economic conditions and funding strategies could compress margins and earnings, while sector-specific risks and variability in investments affect revenue stability.

Catalysts

Operates as the bank holding company for First Business Bank that provides commercial banking products and services for small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals in Wisconsin, Kansas, and Missouri.

• The company's efforts to enhance deposit relationship generation by adding new treasury management experts and incentivizing bankers are expected to support continued loan and deposit growth, which should positively impact revenue through stable net interest margins.
  
• Strategic investments and team expansions in key markets like Southeast Wisconsin and Kansas City, along with high client satisfaction in floor plan finance and accounts receivable finance, suggest strong potential for revenue and earnings growth.
  
• The SBA Lending team’s pipeline improvements, under new leadership, are expected to result in stronger production and gain on sale volume, driving revenue diversification and enhancing overall earnings.
  
• The focus on private wealth management with 43% of fee income from this segment, along with plans to further invest in SBIC funds, indicates continued revenue diversification and the potential for stable or improving net margins.
  
• The company's strategy of maintaining positive operating leverage through expense management supports the potential for improved net margins and a declining efficiency ratio, contributing to healthier earnings growth.

First Business Financial Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Business Financial Services's revenue will grow by 11.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.3% today to 27.0% in 3 years time.
• Analysts expect earnings to reach $54.7 million (and earnings per share of $6.59) by about March 2028, up from $42.3 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 11.0x on those 2028 earnings, up from 9.1x today. This future PE is about the same as the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.91%, as per the Simply Wall St company report.

First Business Financial Services Future Earnings Per Share Growth

Risks

• The global economic environment and potential interest rate fluctuations could impact loan demand and net interest margin, affecting revenue growth expectations.
  
• Dependence on core and wholesale deposits to fund loan growth may expose the bank to increased funding costs, which could compress net interest margins and reduce earnings.
  
• The transportation sector's ongoing weakness in the equipment finance portfolio presents credit risks, potentially impacting asset quality and necessitating higher provisions, which could reduce net income.
  
• Variability in SBA loan sales due to construction completion and sell-versus-hold strategies might affect fee income reliability, introducing potential fluctuations in earnings.
  
• The reliance on SBIC investments and their inherent variability could result in unpredictable returns, impacting overall revenue diversification and consistency in fee income.

Valuation

• The analysts have a consensus price target of $61.4 for First Business Financial Services 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 $202.8 million, earnings will come to $54.7 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $46.66, the analyst price target of $61.4 is 24.0% 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.