Effective Deposit Management And Share Repurchases Will Improve Future Stability

Key Takeaways

• Strategic repositioning and strong deposit growth bolster revenue potential, with a focus on higher-yield investments and cost management improving margins.
  
• The stock buyback program and robust credit quality signal potential for increased EPS and reduced risk from loan losses.
  
• Economic uncertainties and strategic challenges may hinder revenue growth and profitability due to loan balance decreases, increased expenses, and risk management issues.

Catalysts

Operates as the bank holding company for Heritage Bank that provides various financial services to small and medium sized businesses and individuals in the United States.

• Heritage Financial is experiencing strong deposit growth, particularly in non-maturity deposits, which can provide a solid foundation for future revenue growth as these deposits can be leveraged for lending.
  
• The company is actively managing its cost of deposits, which is expected to decrease further as older CDs reprice, potentially improving net margins and earnings.
  
• Heritage Financial's stock buyback program, which still has 990,000 shares available for repurchase, could lead to improved earnings per share (EPS) performance by reducing the number of outstanding shares.
  
• The ongoing strategic repositioning of the bank's balance sheet, including the sale of lower-yield securities and reinvestment in higher-yield opportunities, can further enhance net interest margin and overall profitability.
  
• Maintaining strong credit quality with low levels of nonaccrual and nonperforming loans supports stable future earnings by minimizing the risk of significant loan losses.

Heritage Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Heritage Financial's revenue will grow by 13.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.3% today to 31.9% in 3 years time.
• Analysts expect earnings to reach $103.8 million (and earnings per share of $3.05) by about May 2028, up from $51.4 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 10.0x on those 2028 earnings, down from 15.2x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 1.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Heritage Financial Future Earnings Per Share Growth

Risks

• A decrease in total loan balances due to elevated payoffs and prepayments could lead to lower interest income and affect revenue streams if not offset by new loan growth.
  
• A pretax loss on the sale of securities as part of strategic balance sheet repositioning suggests potential risks in investment management, which could impact earnings if similar losses occur in the future.
  
• Increasing noninterest expenses, particularly from higher benefit costs and payroll taxes, may affect net margins and overall profitability if not controlled effectively.
  
• Emerging economic uncertainties, such as tariffs and changes in federal funding, could impact credit quality and increase credit losses, posing a risk to net margins and earnings.
  
• The decline in new loan commitments due to certain customers suspending capital plans amidst uncertainty could lead to reduced loan growth, affecting future revenue streams.

Valuation

• The analysts have a consensus price target of $27.0 for Heritage Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $31.0, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $325.9 million, earnings will come to $103.8 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $22.94, the analyst price target of $27.0 is 15.0% 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.