Permian Basin Expansion And Credit Management Will Secure Future Success

Key Takeaways

• Proactive credit management and a strong capital position provide stability amidst economic uncertainty, supporting market share and revenue growth.
  
• Focus on geographic expansion and experienced lender hires could drive revenue growth, while shareholder returns are bolstered through dividends and stock repurchases.
  
• Economic uncertainties and elevated loan payoffs could impact loan growth and net interest income, with declining mortgage revenues further constraining earnings.

Catalysts

Operates as a bank holding company for City Bank that provides commercial and consumer financial services to small and medium-sized businesses and individuals.

• Strong credit quality positioning and proactive credit management provide an advantageous position to gain market share and maintain stable net margins amidst economic uncertainty.
  
• Expansion into major metropolitan areas and the Permian Basin indicates potential growth in loan volumes, supporting revenue growth.
  
• Increased focus on hiring experienced lenders and strengthening customer relationships will enable the bank to capitalize on growth opportunities, potentially driving revenue growth.
  
• A solid capital position, which exceeds regulatory requirements, allows for continued organic growth and the flexibility to support customers, impacting both revenue and net margins positively.
  
• The ongoing stock repurchase program and continual quarterly dividend payments suggest a commitment to shareholder returns, which could enhance earnings per share (EPS).

South Plains Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming South Plains Financial's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.4% today to 24.7% in 3 years time.
• Analysts expect earnings to reach $60.4 million (and earnings per share of $3.47) by about May 2028, up from $51.1 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 12.7x on those 2028 earnings, up from 10.9x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

South Plains Financial Future Earnings Per Share Growth

Risks

• The uncertainty created by the new administration's tariff announcements raises the possibility of a national recession, which could negatively impact earnings and net margins.
  
• Loan payoffs exceeded new loan production in major metropolitan markets, potentially reducing future interest revenue and constraining loan growth.
  
• A decline in mortgage banking revenues and mortgage servicing rights asset value decreased noninterest income and could continue to impact earnings if housing markets do not recover as anticipated.
  
• Elevated payoffs, particularly in real estate loans, might persist and could offset positive loan growth, impacting overall revenue from interest income.
  
• Economic conditions, particularly interest rates and inflation, could impact both deposit costs and loan yields, constraining net interest income and margin expansion potential.

Valuation

• The analysts have a consensus price target of $42.5 for South Plains Financial 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 $45.0, and the most bearish reporting a price target of just $38.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $244.2 million, earnings will come to $60.4 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $34.35, the analyst price target of $42.5 is 19.2% 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.