Calculated Moves And Growth Forecasts Paint A Bright Future Amid Challenges

Key Takeaways

• Trustmark's restructuring and sale of non-performing assets are poised to enhance profitability and reduce credit risk, improving loan quality.
  
• Anticipated growth in core business operations indicates a solid foundation for earnings growth, underscored by efficient cost management and capital flexibility.
  
• Trustmark's strategy involving portfolio restructuring and non-routine transactions indicates potential investment and credit risks, impacting future earnings and sustainable revenue streams.

Catalysts

Operates as the bank holding company for Trustmark National Bank that provides banking and other financial solutions to individuals and corporate institutions in the United States.

• The restructuring of Trustmark's available-for-sale (AFS) securities portfolio is expected to significantly boost its net interest margin and enhance profitability by improving the yield on the securities portfolio, which directly impacts earnings.
  
• The sale of non-performing loans, specifically those that were 3 payments or more delinquent, although resulting in a loss, has reduced the risk profile of the mortgage portfolio. This action has led to a significant reduction in non-performing loans, potentially improving loan quality and reducing future credit loss provisions, positively impacting net margins.
  
• The completion of the sale of Fisher Brown Bottrell Insurance at attractive multiples has generated substantial after-tax gain, enhancing capital flexibility. This gain contributes to overall earnings, further indicative of underutilized assets being leveraged for financial improvement.
  
• Continued focus on diligent expense management, as indicated by the decline in non-interest expense linked-quarter, suggests an operational efficiency that can lead to improved net margins through cost containment.
  
• The anticipated growth in loans held for investment and deposits, alongside expectations for net interest income increase low-single digits in 2024, suggests a solid foundation for revenue growth. This fundamental strength in core business operations is expected to drive earnings growth.

Assumptions

• Analysts are assuming Trustmark's revenue will grow by 28.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 54.7% in 3 years time.
• Analysts expect earnings to reach $616.6 million (and earnings per share of $10.32) by about September 2027, up from $14.2 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 4.4x on those 2027 earnings, down from 135.9x today. This future PE is lower than the current PE for the US Banks industry at 11.5x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.82%, as per the Simply Wall St company report.

Risks

• The restructuring of the AFS securities portfolio, resulting in a significant upfront loss of $182.8 million, could indicate potential vulnerabilities in the company's investment strategy, impacting future earnings.
  
• Engaging in transactions like the sale of mortgage loans that were delinquent or in nonaccrual, which resulted in a $10.1 million loss, highlights credit risk challenges in the loan portfolio that may affect net margins.
  
• Relying on significant non-routine items, such as the sale of Fisher Brown Bottrell Insurance for a substantial gain, suggests that ongoing profitability may depend on one-off transactions rather than core operational strength, risking sustainable revenue streams.
  
• Projected increases in noninterest expense in the second half of the year following a merit increase delay into July may strain operational efficiency and net margins if revenue growth does not outpace expense growth.
  
• The acknowledgment of risk rate migration and the associated increase in provisions for credit losses within the commercial real estate portfolio may signal potential for higher credit losses, impacting earnings if economic conditions deteriorate or if there's further stress in the real estate market.

Valuation

• The analysts have a consensus price target of $37.2 for Trustmark based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $616.6 million, and it would be trading on a PE ratio of 4.4x, assuming you use a discount rate of 5.8%.
• Given the current share price of $31.55, the analyst's price target of $37.2 is 15.2% 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.