Avenu Platform's Promise Sparks Growth Hopes But Rising Costs And Risks Loom

Key Takeaways

• Strategic cost management and loan repricing are set to enhance net interest margins and drive future revenue growth.
  
• Avenu Banking-as-a-Service will diversify income and strengthen asset quality through low-cost deposits and digital channels.
  
• Challenges in deposit growth, credit quality issues, and tech investment risks could pressure margins and profitability, especially if the Avenu platform underperforms.

Catalysts

Operates as the bank holding company for MainStreet Bank that provides various banking products and services for individuals, small to medium-sized businesses, and professional service organizations.

• The company's strategy to lower deposit costs and achieve net interest margin expansion is expected to positively impact near-term earnings and improve profit margins.
  
• The development and adoption of the Avenu Banking-as-a-Service platform aims to acquire low-cost deposits and diversify revenue through digital channels, likely benefiting the bank's income and net interest margin over time.
  
• Expected improvement in loan classifications and a reduction in criticized and nonperforming loans suggest stronger asset quality and potential recovery of earnings impacted by previous provisions.
  
• Initiatives to control noninterest expenses and the strategic rollout of Avenu are expected to enhance efficiency ratios and future earnings as the investment in technology starts to generate fee income.
  
• The bank's ability to strategically adjust funding strategies and capitalize on rate changes, including the repricing of a significant portion of loans, positions it to enhance its net interest margin, supporting future revenue growth.

MainStreet Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MainStreet Bancshares's revenue will grow by 14.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.6% today to 11.0% in 3 years time.
• Analysts expect earnings to reach $10.4 million (and earnings per share of $1.15) by about November 2027, up from $9.2 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 20.9x on those 2027 earnings, up from 14.8x today. This future PE is greater than the current PE for the US Banks industry at 13.2x.
• Analysts expect the number of shares outstanding to grow by 6.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.16%, as per the Simply Wall St company report.

MainStreet Bancshares Future Earnings Per Share Growth

Risks

• There are challenges with traditional deposit growth, especially in the competitive market in the D.C. area, which could affect funding costs and pressure net interest margins if the Avenu solution does not deliver expected low-cost deposits.
  
• Recent quarterly performance includes losses due to problem loans and nonperforming assets, impacting earnings and net interest margins, with no immediate recovery in sight, which may signal ongoing credit quality issues.
  
• Increased noninterest expenses from investments in the Avenu platform and tech-related costs could pressure net earnings, especially if projected fee income and cost efficiencies are not realized in the timeline expected.
  
• The cost of funds might not decrease as anticipated, impacting net interest margins since they remain dependent on achieving deposit growth through unproven fintech relationships via Avenu, which may be volatile or slower to materialize than planned.
  
• Regulatory and competitive risks exist for the development and deployment of Avenu, and any delays or missteps could increase costs and push further the break-even point, impacting overall profitability and financial stability.

Valuation

• The analysts have a consensus price target of $20.25 for MainStreet Bancshares 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 2027, revenues will be $94.6 million, earnings will come to $10.4 million, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $18.4, the analyst's price target of $20.25 is 9.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.