Management Will Explore Acquisitions To Unlock Synergies And Expand Future Prospects

Key Takeaways

• Strong community-based deposit franchise and disciplined acquisition strategy could enhance margins and improve future earnings.
  
• Strategic capital allocation, including stock repurchases, aims to boost EPS and shareholder value amidst preparations for economic growth.
  
• Fluctuating earnings stability, conservative loan growth, elevated loan payoffs, and competitive pressures in the auto loan sector challenge South Plains Financial's revenue generation and profit margins.

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.

• South Plains Financial anticipates strong new business production, with optimism in their customer base driving low to mid-single-digit loan growth in 2025, impacting revenue positively.
  
• The company has maintained a strong community-based deposit franchise, allowing them to optimize net interest margin (NIM) by repricing deposits, which could enhance net margins.
  
• South Plains is exploring potential acquisitions with a disciplined approach, focusing on opportunities with a strong cultural fit and minimal shareholder dilution, which could create revenue synergies and improve future earnings.
  
• They have a strategic capital allocation plan, including quarterly dividends and a $10 million stock repurchase program, potentially boosting earnings per share (EPS) and shareholder value.
  
• Management expects to capitalize on growing optimism for economic acceleration, enhancing organic growth in their community and metropolitan markets, which could increase earnings.

South Plains Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming South Plains Financial's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.0% today to 25.4% in 3 years time.
• Analysts expect earnings to reach $59.6 million (and earnings per share of $3.44) by about January 2028, up from $49.7 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 14.8x on those 2028 earnings, up from 12.1x 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 1.8% 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.

South Plains Financial Future Earnings Per Share Growth

Risks

• South Plains Financial experienced a decline in diluted earnings per share from $3.62 in 2023 to $2.92 in 2024, primarily due to the previous year's one-time gain from the sale of its insurance subsidiary, which could create concerns about maintaining consistent earnings growth. This impacts their overall earnings stability.
  
• The company anticipates low to mid-single-digit loan growth for 2025, which could appear limited, especially against a backdrop of strong loan demand and potential economic growth. Such conservative growth expectations might impact revenue projections.
  
• South Plains faces elevated loan payoffs, particularly in its metro markets, which have been a headwind to loan growth. Continuous high payoffs could mitigate the effect of new loan production and affect net margins.
  
• Net interest income experienced a $1.6 million decline in interest expense, counteracted by a decrease in loan interest income, indicating pressure of achieving stable net interest growth under changing rate conditions, thereby affecting profit margins.
  
• The bank is facing competitive pressures in the auto loan sector, resulting in a $15 million decline in balances over 2024, straining the company's ability to achieve projected loan growth and potentially impacting revenue generation.

Valuation

• The analysts have a consensus price target of $43.75 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 $47.0, and the most bearish reporting a price target of just $39.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $234.4 million, earnings will come to $59.6 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $36.44, the analyst's price target of $43.75 is 16.7% 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.