Tech Investments And Loan Growth Propel Potential Amid Analysts' Caution Over Shrinking Margins

Key Takeaways

• Strengthening customer deposit base through core deposit growth suggests lower funding costs and enhanced net interest margins.
  
• Diversified revenue streams from increased fee-based income and technological investments indicate potential for long-term growth in revenue and earnings.
  
• Risks including rising interest costs, credit losses in leasing and auto lending, and technological investment execution could impact profitability and efficiency.

Catalysts

Operates as the holding company for Peoples Bank that provides commercial and consumer banking products and services.

• Loan growth of 8% annualized could lead to increased interest income, contributing to future revenue growth.
  
• Decline in criticized and classified loans might reduce the provision for credit losses, potentially improving net margins.
  
• Growth in core deposits excluding brokered CDs indicates strengthening customer deposit base, which could lead to lower funding costs and improved net interest margins.
  
• Improvements in fee-based income excluding annual performance-based insurance commissions suggest diversified revenue streams, which could contribute to overall revenue growth and stability.
  
• Investments in technology and infrastructure, including a new customer relationship management system, may enhance operational efficiency and service delivery, supporting long-term growth in revenue and earnings.

Assumptions

• Analysts are assuming Peoples Bancorp's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.4% today to 21.9% in 3 years time.
• Analysts expect earnings to reach $104.8 million (and earnings per share of $2.92) by about September 2027, down from $123.3 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 2027 earnings, up from 8.4x today. This future PE is greater than the current PE for the US Banks industry at 11.5x.
• 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 dollars, we will use a discount rate of 6.1%, as per the Simply Wall St company report.

Risks

• The rising interest and borrowing costs could lead to margin compression, impacting net interest margin and therefore net interest income.
  
• An uptick in net charge-offs, particularly in the Small-Ticket leasing segment, potentially affecting earnings through increased credit losses.
  
• The ongoing adjustments in the lending approach within the Small-Ticket leasing business could result in fluctuating revenues from this segment, impacting overall profitability.
  
• Elevated delinquency rates in auto lending, contributing to higher net charge-offs in consumer indirect loans, might affect the loan portfolio's performance and result in higher provisions for credit losses.
  
• The dependence on technological investments for operational efficiency could introduce execution risk and increase operational costs if expected efficiency gains are not realized, impacting the expense ratio and net earnings.

Valuation

• The analysts have a consensus price target of $35.6 for Peoples 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 $41.0, and the most bearish reporting a price target of just $33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $478.7 million, earnings will come to $104.8 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 6.1%.
• Given the current share price of $29.7, the analyst's price target of $35.6 is 16.6% 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.