Midwest Business Activity And Digital Upgrades Will Boost Future Potential

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AnalystConsensusTarget
Consensus Narrative from 6 Analysts
Published
24 Sep 24
Updated
07 Aug 25
AnalystConsensusTarget's Fair Value
US$46.83
20.8% undervalued intrinsic discount
07 Aug
US$37.07
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Author's Valuation

US$46.8

20.8% undervalued intrinsic discount

AnalystConsensusTarget Fair Value

Last Update30 Apr 25
Fair value Decreased 8.96%

Key Takeaways

  • Regional population growth and increased business activity are driving strong loan and deposit demand, fueling future revenue and fee income potential.
  • Digital transformation and talent investments are improving operational efficiency, competitive positioning, and setting the stage for sustained organic growth.
  • Intense regional competition, reliance on non-core funding, lagging digital innovation, and concentrated real estate exposure could constrain growth, profitability, and long-term competitiveness.

Catalysts

About First Merchants
    Operates as the financial holding company for First Merchants Bank that provides commercial and consumer banking services.
What are the underlying business or industry changes driving this perspective?
  • Rapid migration and economic growth in core Midwest markets is fueling strong, broad-based loan demand-evidenced by high single-digit loan growth and a robust commercial pipeline-suggesting further revenue acceleration as regional population and business expansion trends persist.
  • Increased small business formation and entrepreneurial activity across the region supports heightened demand for business banking and treasury services, positioning the company for continued core deposit growth, higher-market-share, and expanding fee income.
  • Investments in digital platforms, internal tech efficiencies, and upgraded customer-facing solutions are improving operational leverage, reducing expenses, and enabling competitive differentiation; this digital transformation is likely to sustain improved net margins and retention rates.
  • Ongoing capital strength, tangible book value per share growth, and management's balanced approach to capital deployment (including buybacks and potential M&A) provide flexibility for enhancing earnings per share and delivering consistent dividend growth.
  • Strategic hiring of commercial and small business banking talent, together with further investments in wealth management capabilities, lays the foundation for future organic growth and cross-sell, supporting higher revenue and fee income streams over time.

First Merchants Earnings and Revenue Growth

First Merchants Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming First Merchants's revenue will grow by 7.4% annually over the next 3 years.
  • Analysts assume that profit margins will shrink from 35.0% today to 28.1% in 3 years time.
  • Analysts expect earnings to reach $221.9 million (and earnings per share of $3.95) by about August 2028, down from $223.8 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 14.2x on those 2028 earnings, up from 9.7x today. This future PE is greater than the current PE for the US Banks industry at 11.1x.
  • Analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

First Merchants Future Earnings Per Share Growth

First Merchants Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Higher funding costs and intense deposit competition within core Midwest markets are likely to continue, risking net interest margin compression even if loan growth endures, which could reduce net margin and earnings growth.
  • Heavy geographic concentration in Indiana, Michigan, Ohio, and neighboring states exposes First Merchants to regional economic downturns or demographic shifts (e.g., population stagnation or out-migration from the Midwest), potentially impeding organic loan and deposit growth and impacting long-term revenue expansion.
  • Brokered deposits have grown to 8% of funding with a 10% internal limit, highlighting reliance on non-core funding sources; further increases could constrain balance sheet flexibility and increase funding costs, negatively impacting profitability.
  • Slower-than-peer adoption of digital innovation, with recent tech upgrades described as "on par" rather than market-leading, risks First Merchants falling behind larger competitors and fintechs-potentially limiting future fee income growth, customer acquisition, and overall competitiveness.
  • Commercial real estate lending and office loan exposure, while "within regulatory limits," remain a risk if macroeconomic or sector-specific conditions worsen, as even a few isolated loan defaults could erode asset quality and inflate credit losses, pressuring net income and book value.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $46.833 for First Merchants 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 $790.6 million, earnings will come to $221.9 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 6.9%.
  • Given the current share price of $37.46, the analyst price target of $46.83 is 20.0% 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.

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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