Expansion Into DC And Jacksonville Will Drive Future Success

Key Takeaways

• Expansion into high-growth markets and new lending specialties is expected to drive substantial loan growth and net interest income.
  
• Emphasis on deposit growth and treasury management aims to reduce funding costs and boost fee income, supporting revenue and margins.
  
• Reliance on recruitment and loan growth poses revenue risks amid economic downturns, with high asset quality and performance-linked incentives crucial for maintaining financial stability.

Catalysts

Operates as the bank holding company for Pinnacle Bank that provides various banking products and services to individuals, businesses, and professional entities in the United States.

• Pinnacle Financial Partners has set a record for hiring highly experienced revenue producers, which fuels optimism for future revenue growth, EPS, and tangible book value per share due to increased market share. This impacts revenue.
  
• Strategic initiatives, such as expanding into high-growth markets like D.C. and Jacksonville, along with new specialties in franchise and equipment lending, are expected to drive higher loan growth and, consequently, net interest income. This impacts revenue and net margins.
  
• The firm is placing a strong emphasis on growing deposit verticals, which contributed to significant deposit growth in 2024. This strategy should support future revenue growth and net interest margins by reducing funding costs. This impacts net margins.
  
• Pinnacle's continued focus on treasury management and operating accounts is anticipated to drive significant fee income growth, contributing to overall financial performance. This impacts revenue.
  
• With an expected 11% to 13% growth in net interest income for 2025, Pinnacle is poised to benefit from a potentially more favorable yield curve, enhancing net interest margin and earnings. This impacts earnings.

Pinnacle Financial Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pinnacle Financial Partners's revenue will grow by 16.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.5% today to 31.7% in 3 years time.
• Analysts expect earnings to reach $813.4 million (and earnings per share of $10.6) by about January 2028, up from $459.9 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 14.9x on those 2028 earnings, down from 20.7x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Pinnacle Financial Partners Future Earnings Per Share Growth

Risks

• The reliance on growth through recruitment of revenue producers poses a risk as any slowdown in hiring or integration challenges could impact revenue and EPS growth. This also ties up resources that could otherwise go into cost control or diversification, affecting net margins.
  
• Significant dependency on sustained loan and deposit growth could be adversely impacted if economic conditions sour or competition intensifies, threatening revenue and margins, as 70%-80% of earnings depend on balance sheet margins.
  
• Asset quality must remain high; however, any significant economic downturn could lead to outsized loan losses, damaging EPS, tangible book value, and overall financial performance.
  
• Heavy focus on variable incentives may lead to increased expenses if performance does not meet targets, thus putting pressure on net margins, especially if revenue growth does not offset increased costs.
  
• The potential volatility and unpredictability of BHG’s activities and earnings, especially given recent adjustments and strategic refocusing, could contribute to fluctuations in fee income growth, impacting overall earnings stability.

Valuation

• The analysts have a consensus price target of $134.6 for Pinnacle Financial Partners 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 $148.0, and the most bearish reporting a price target of just $120.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $813.4 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 5.9%.
• Given the current share price of $124.51, the analyst's price target of $134.6 is 7.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.