Calculated Investments And Diversification Propel Future Revenue And Margin Growth In Finance Industry

Key Takeaways

• Strategic investments and deposit growth are expected to boost future revenue and enhance earnings.
  
• Shareholder value focus and capital accretion aim to support future earnings per share growth.
  
• Forecasted lower net interest income, economic uncertainly suppressing loan demand, and competitive pressures may strain revenue and margins despite a strong capital position.

Catalysts

Operates as the bank holding company for Old National Bank that provides various financial services to individual and commercial customers in the United States.

• Strong organic deposit growth and strategic investments in new markets and talent are expected to boost future revenue growth and enhance earnings.
  
• Growing tangible book value per share by 21% year-over-year indicates a focus on shareholder value, which may support future earnings per share (EPS) growth.
  
• Investment in fee income businesses like treasury management and wealth management is likely to improve revenue diversification and contribute to higher net margins.
  
• A neutral rate risk position and proactive management of deposit costs are designed to protect net interest income and margins in fluctuating interest rate environments.
  
• The strategic focus on capital accretion and a robust CET1 ratio (11%) suggests potential for increased capital returns, such as share buybacks, which can enhance EPS.

Old National Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Old National Bancorp's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.7% today to 33.5% in 3 years time.
• Analysts expect earnings to reach $738.2 million (and earnings per share of $2.32) by about November 2027, up from $501.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2027 earnings, down from 13.3x today. This future PE is lower than the current PE for the US Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Old National Bancorp Future Earnings Per Share Growth

Risks

• The forecast for the fourth quarter net interest income was lower than previous expectations, partly due to changes in the interest rate environment, which could negatively impact revenue growth.
  
• There is cautiousness among commercial customers related to economic uncertainty and upcoming elections, which might suppress loan demand and, consequently, revenue prospects.
  
• Although Old National's capital position is strong, continued conservative risk rating for credit quality amid higher interest rates indicates potential for increased credit costs, impacting net margins.
  
• The company has seen an increase in nonaccrual loans, and ongoing downgrades in risk ratings might signal increasing credit risk, potentially affecting net earnings through higher allowances or charge-offs.
  
• Competitive pressures in both loan and deposit markets have increased, which could pose risks to margins if Old National is forced to accept lower spreads to maintain growth.

Valuation

• The analysts have a consensus price target of $23.38 for Old National Bancorp 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 $26.0, and the most bearish reporting a price target of just $21.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.2 billion, earnings will come to $738.2 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 6.5%.
• Given the current share price of $20.97, the analyst's price target of $23.38 is 10.3% 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.