Expansion Into Equipment Finance And Mortgages Will Support Future Profitability

Key Takeaways

• Restructuring and strategic deposit pricing are boosting net interest income and stabilizing costs, potentially enhancing revenue and net margins.
  
• Expansion in Equipment Finance and mortgages, alongside disciplined expense management, could drive revenue growth and increase profitability.
  
• Limited revenue growth potential and cost pressures, alongside credit quality issues, risk compressing margins and profitability amidst reliance on favorable Federal Reserve actions.

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.

• Trustmark's restructuring of the investment securities portfolio has led to a 9.5% increase in net interest income and is expected to support mid-single-digit net interest income growth in 2024. This should positively impact revenue.
  
• Strategic deposit pricing actions taken in response to Federal Reserve rate changes are projected to stabilize and potentially lower deposit costs, helping maintain a net interest margin of 3.65% to 3.70% in the second half of 2024, which can improve net margins.
  
• Expansion in the Equipment Finance and mortgage sectors is anticipated to generate new revenue streams, contributing to overall revenue growth.
  
• The provision for credit losses is managed effectively, maintaining net charge-offs below industry average, which could lead to improved net earnings if credit quality remains strong.
  
• With disciplined expense management and stable noninterest expenses anticipated for 2024, Trustmark aims to maintain operating efficiency, which could enhance net margins and profitability.

Trustmark Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Trustmark's revenue will grow by 17.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 29.8% in 3 years time.
• Analysts expect earnings to reach $270.9 million (and earnings per share of $4.89) by about December 2027, up from $35.0 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 9.6x on those 2027 earnings, down from 64.7x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 3.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.03%, as per the Simply Wall St company report.

Trustmark Future Earnings Per Share Growth

Risks

• The expectation for low single-digit loan growth in 2024 indicates limited expansion in revenue-generating activities, which could impact overall revenue growth.
  
• The slight decrease in noninterest income from adjusted continuing operations highlights reliance on fewer revenue sources, potentially affecting earnings stability if such trends continue.
  
• Increases in noninterest expenses, driven by higher salaries, incentives, and commissions, could compress net margins if not managed effectively or if revenue does not grow at the same rate.
  
• The provision for credit losses and increase in nonperforming assets suggest potential future credit quality issues, which may impact net income if losses increase.
  
• Potential reliance on interest rate cuts by the Federal Reserve and the ability to effectively manage deposit pricing could pose a risk to maintaining an adequate net interest margin, thereby affecting profitability.

Valuation

• The analysts have a consensus price target of $39.75 for Trustmark 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 $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $909.1 million, earnings will come to $270.9 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 6.0%.
• Given the current share price of $37.02, the analyst's price target of $39.75 is 6.9% 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.