Expanding Market Footprint And Calculated Initiatives Signal Robust Future Growth

Key Takeaways

• Effective management of problem credits and bank acquisitions is set to bolster net margins and expand the customer base.
  
• Strong loan pipeline growth and enhanced service revenues are anticipated to drive earnings and revenue expansion.
  
• Inflation pressures and credit quality risks could constrain margins and revenue, while economic challenges and interest rate changes pose potential earnings impacts.

Catalysts

Operates as the bank holding company for Equity Bank that provides a range of banking, mortgage banking, and financial services to individual and corporate customers.

• The resolution of the defaulted franchisor borrower resulted in a $8.5 million recovery, which underscores the company’s ability to manage problem credits effectively. This can positively impact net margins and future earnings through reduced credit losses.
  
• The bank recently closed and converted two bank acquisitions, including KansasLand, effectively expanding its footprint and potential customer base. This is likely to boost revenue and earnings through increased market presence and synergy benefits.
  
• Equity Bancshares reported strong pipeline growth in loans, with $448 million in the 75% or greater completion stage. This suggests anticipated growth in loan origination and revenue in upcoming quarters.
  
• The company introduced a comprehensive sales training program aimed at expanding its customer base and increasing franchise value. This is expected to drive revenue growth and operational efficiencies, thereby positively impacting net margins.
  
• Rising service revenues, with improving contributions from cards, trust wealth management, and mortgage services, are expected to bolster non-interest income, enhance revenue streams, and increase overall earnings growth.

Equity Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Equity Bancshares's revenue will grow by 21.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.0% today to 31.1% in 3 years time.
• Analysts expect earnings to reach $87.7 million (and earnings per share of $5.92) by about November 2027, up from $17.3 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 9.4x on those 2027 earnings, down from 42.7x today. This future PE is lower than the current PE for the US Banks industry at 13.3x.
• Analysts expect the number of shares outstanding to decline by 1.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.22%, as per the Simply Wall St company report.

Equity Bancshares Future Earnings Per Share Growth

Risks

• Inflation pressures on smaller borrowers like quick service restaurants may lead to margin constraints, potentially impacting revenue and earnings.
  
• The bank experienced an increase in nonaccrual loans, indicating emerging risks in credit quality that could increase provision expenses and reduce net margins.
  
• Despite a positive outlook, potential economic challenges remain a concern, requiring reserves that may affect net income if used.
  
• The compressing net interest margin, primarily due to declining loan yields, could restrict growth in net interest income and earnings over time.
  
• The reliance on quick interest rate changes management through wholesale borrowings and cash, while currently producing a positive spread, might impact the margin negatively if rates continue to fall.

Valuation

• The analysts have a consensus price target of $49.4 for Equity Bancshares 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 $56.0, and the most bearish reporting a price target of just $43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $282.4 million, earnings will come to $87.7 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 6.2%.
• Given the current share price of $48.47, the analyst's price target of $49.4 is 1.9% 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.