Upgraded Platforms And Core Market Expansion Will Drive Customer Acquisition

Key Takeaways

• Focused expansion in core markets and innovative strategies are anticipated to bolster loan demand and market share, supporting revenue growth.
  
• Effective management of deposit costs is aimed at improving net interest margin, supporting earnings and sustaining growth.
  
• Increased credit risk exposure, branch sales impact, and economic uncertainties threaten profitability despite asset growth.

Catalysts

Operates as the financial holding company for First Merchants Bank that provides commercial and consumer banking services.

• The upgrade of First Merchants' online and mobile platforms, private wealth platform, and wire platform are expected to enhance customer experiences, drive customer acquisition, and improve operational efficiencies, likely impacting revenue growth positively.
  
• The focused expansion strategy in core markets (Indiana, Ohio, and Michigan) with innovative customer acquisition strategies is anticipated to bolster loan demand and market share, supporting revenue growth.
  
• Loan growth in the commercial and consumer segments, particularly in Commercial & Industrial (C&I) loans, is strong and expected to continue. This will likely contribute significantly to the bank's revenue growth.
  
• Effective management of deposit costs, including a reduction in high-cost deposit categories, aims to improve the bank's net interest margin, supporting earnings growth.
  
• Strong capital ratios and the ability to fund loan growth through internal cash flows suggest potential for increased earnings without immediate need for external capital, supporting net margin and earnings growth.

First Merchants Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Merchants's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.7% today to 32.3% in 3 years time.
• Analysts expect earnings to reach $257.5 million (and earnings per share of $4.51) by about March 2028, up from $199.5 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 13.8x on those 2028 earnings, up from 11.6x today. This future PE is greater than the current PE for the US Banks industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

First Merchants Future Earnings Per Share Growth

Risks

• The company is facing increased exposure to credit risks, particularly within the commercial and industrial (C&I) and commercial real estate sectors. This exposure could lead to increased loan losses and impact net margins.
  
• The sale of Illinois branches and corresponding restructuring led to immediate capital gains, but the loss of these branches could reduce the company's future revenue and customer base.
  
• Despite asset growth, the company has experienced declines in certain deposit segments, such as public funds. This could increase deposit costs and negatively impact net interest margins.
  
• Ongoing economic uncertainties, including proposed tariffs and slow M&A activity, may suppress loan demand and revenue growth, potentially affecting earnings.
  
• Interest rate fluctuations, particularly potential Fed rate cuts, may lead to decreased yields on variable rate loans, impacting overall revenue and profitability.

Valuation

• The analysts have a consensus price target of $51.0 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 $797.8 million, earnings will come to $257.5 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $39.68, the analyst price target of $51.0 is 22.2% 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.