Focusing On Organic Growth And Capital Optimization Will Strengthen Operations By 2025

Key Takeaways

• Focus on NIM expansion and balance sheet optimization could enhance net margins, earnings, and returns on invested capital.
  
• A disciplined approach prioritizing soundness and growth aims to improve profitability, potentially bolstered by yield curve changes and loan repricing.
  
• The company's growth and profitability plans face risks from uncertain loan demand, competition, deposit challenges, potential credit issues, and executive retirements.

Catalysts

Operates as the holding company for Simmons Bank that provides banking and other financial products and services to individuals and businesses.

• Simmons First National is focusing on net interest margin (NIM) expansion and is optimistic about achieving over a 3% NIM in the latter half of 2025, potentially increasing net margins and earnings if successful.
  
• The company is prioritizing organic growth and plans to optimize capital usage for organic balance sheet initiatives and balance sheet restructuring, which could enhance returns on invested capital and ultimately revenue.
  
• The fixed-rate loan portfolio is expected to reprice higher by around 200 basis points, providing a continued tailwind for loan yield improvements through 2026, positively impacting net margins and earnings.
  
• The bank is committed to maintaining a disciplined approach focusing on soundness, profitability, and growth, which could enhance its efficiency ratio and improve profitability and net margins.
  
• The potential steepening of the yield curve and successful restructuring of the balance sheet could lead to improved NIM, achieving a target of a 350-basis-point NIM, supporting a stronger return on assets and profitability.

Simmons First National Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Simmons First National's revenue will grow by 13.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.3% today to 27.7% in 3 years time.
• Analysts expect earnings to reach $281.4 million (and earnings per share of $2.3) by about January 2028, up from $128.3 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 12.9x on those 2028 earnings, down from 21.9x today. This future PE is greater than the current PE for the US Banks industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.24%, as per the Simply Wall St company report.

Simmons First National Future Earnings Per Share Growth

Risks

• The company's reliance on optimistic assumptions regarding future net interest margin expansion may face risks due to potential economic downturns or changes in Fed policy, which could lead to lower revenue and net margins.
  
• Uncertainty about loan growth, particularly low demand and competition for high-quality credit, could impact revenue generation and profitability if the anticipated growth does not materialize.
  
• Intense competition on the deposit side and ongoing challenges in optimizing deposit costs could limit net interest income, affecting overall earnings.
  
• Potential credit risks in specific portfolios, especially those identified as runoff, could lead to unexpected charge-offs and impairments, affecting net earnings and credit quality.
  
• Large retirements of key executives could introduce operational and strategic uncertainties, potentially impacting the company's ability to execute its growth and profitability plans.

Valuation

• The analysts have a consensus price target of $24.8 for Simmons First National 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 $29.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $281.4 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $22.36, the analyst's price target of $24.8 is 9.8% 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.