Aggressive Expansion Will Burden Margins And Raise Expenses

Key Takeaways

• Aggressive expansion strategy could lead to increased operational costs and pressure net margins without proportional revenue growth.
  
• Over-reliance on expansion-driven growth risks earnings stability if new markets lack consistent profitability.
  
• Strategic expansion and robust financial growth indicate Cullen/Frost Bankers' resilience against share price pressures, with promising prospects in consumer and commercial segments.

Catalysts

Operates as the bank holding company for Frost Bank that provides commercial and consumer banking services in Texas.

• The company's aggressive expansion strategy, increasing the number of financial centers from around 130 to 200 since 2018, may lead to higher operational costs without a guaranteed proportional increase in revenue, potentially impacting net margins as these new centers may take time to become profitable.
  
• The guidance for full-year 2025 has an expectation of 425 basis point rate cuts with associated impacts on the net interest margin; unexpected shifts in interest rate policy could compress net interest margins or result in lower than expected net interest income growth of 5% to 7%.
  
• The dependence on expansion-generated growth, with expansion now representing 9% of total loans and 6% of deposits, might indicate a potential over-reliance on new markets that have yet to prove consistent profitability, potentially affecting earnings stability.
  
• The increase in noninterest expense growth guidance to high single digits, driven by ongoing technology investments and employee benefits, could compress net margins further as technology costs are rising as a higher percentage of overall expenses.
  
• The significant assumed loan growth and market share gains driven by new relationships in recent expansions may be optimistic; failure to achieve such growth could negatively impact revenue expectations.

Cullen/Frost Bankers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cullen/Frost Bankers's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.7% today to 23.1% in 3 years time.
• Analysts expect earnings to reach $540.4 million (and earnings per share of $8.67) by about May 2028, down from $585.1 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 18.8x on those 2028 earnings, up from 13.4x 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 grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.35%, as per the Simply Wall St company report.

Cullen/Frost Bankers Future Earnings Per Share Growth

Risks

• Cullen/Frost Bankers has demonstrated significant earnings growth year-over-year, from $134 million to $149.3 million, supported by an increase in both net margins and revenue. This indicates their ability to maintain robust financial health even in challenging environments. This earnings momentum might continue countering a decline in share price.
  
• The bank's expansion strategy has been effectively implemented, with a 50% increase in financial center locations since late 2018 and the continued accretion of this expansion to earnings. The geographical expansion could sustain revenue growth, contradicting a potential decline in share price.
  
• Strong growth in consumer banking, with consumer deposits and loan balances up 3.8% and 20.5% respectively, supported by award-winning customer satisfaction, could drive sustained revenue. This organic growth indicates resilience that might defy anticipated price declines.
  
• The bank's commercial segment is experiencing record-high new commercial relationships and a strong pipeline of opportunities, indicating promising revenue prospects and effective risk management, which could mitigate share price reduction.
  
• Improved net interest margin, driven by strategic investment management and lower deposit costs, adds to the bank's earnings potential, which could support a stable or rising share price despite external pressures.

Valuation

• The analysts have a consensus price target of $131.636 for Cullen/Frost Bankers 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 $145.0, and the most bearish reporting a price target of just $109.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $540.4 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $122.39, the analyst price target of $131.64 is 7.0% 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.