Investments In Texas Markets And Strong Deposits Will Secure Future Success

Key Takeaways

• Strategic investments in Texas markets and consumer loan growth indicate potential for sustainable revenue and earnings expansion.
  
• Strong deposit growth without incentives suggests loyal customer base, supporting stable interest margins and financial stability.
  
• Rising non-performing assets, dependency on loan growth, and regulatory shifts could pressure earnings in a highly competitive market.

Catalysts

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

• Cullen/Frost's continued investment in their successful organic growth strategy in key Texas markets (Houston, Dallas, and Austin) is expected to be accretive to earnings by 2026, which should positively impact future revenue and overall earnings.
  
• The bank's strong growth in consumer loans, especially in home equity and the introduction of new mortgage products, shows potential for sustained revenue growth due to long-term consumer finance demand.
  
• Cullen/Frost's ability to grow deposits without using financial incentives suggests strong customer loyalty and service quality, potentially leading to stable or improved net interest margins as deposit volume grows.
  
• The bank's disciplined expansion into rapidly growing Texas markets could increase new household and business relationships, catalyzing further loan and deposit growth, hence bolstering revenue and earnings in the medium to long term.
  
• Improvements in credit quality and reduced problem loan levels, coupled with a stable outlook on returns from its investment portfolio, could enhance the bank's financial stability and net margins.

Cullen/Frost Bankers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cullen/Frost Bankers's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.3% today to 23.7% in 3 years time.
• Analysts expect earnings to reach $515.8 million (and earnings per share of $8.13) by about December 2027, down from $517.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $607.3 million in earnings, and the most bearish expecting $434.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2027 earnings, up from 16.9x today. This future PE is greater than the current PE for the US Banks industry at 12.5x.
• Analysts expect the number of shares outstanding to decline by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.1%, as per the Simply Wall St company report.

Cullen/Frost Bankers Future Earnings Per Share Growth

Risks

• The decrease in net charge-offs is encouraging, but an increase in non-performing assets, especially with a notable credit moving to non-accrual, could signal potential future risk to earnings and net margins.
  
• The anticipated full-year decrease in average deposits of 1% to 2% could limit the bank's liquidity growth, which might affect revenue stability.
  
• The company's reliance on loan growth for revenue, with new loan commitments seeing only a marginal increase, risks underperformance if loan demand weakens or economic conditions deteriorate, impacting earnings.
  
• High competition in both the consumer and commercial sectors, which is driving the company to rely on strategic growth initiatives, could limit organic market share gains, thus affecting revenue forecasts.
  
• The potential impact of regulatory changes on non-interest income, particularly in the face of intensifying market competition, could pressure future revenues.

Valuation

• The analysts have a consensus price target of $132.92 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 $149.0, and the most bearish reporting a price target of just $106.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.2 billion, earnings will come to $515.8 million, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 6.1%.
• Given the current share price of $135.96, the analyst's price target of $132.92 is 2.3% lower. 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.