Cost Discipline And Organic Mortgage Opportunities Will Secure Robust Performance

Key Takeaways

• Effective deposit cost management and strategic capital deployment could drive further net interest margin expansion and enhance earnings per share.
  
• The company's diversified business model and focus on cost discipline may boost earnings stability and shield against economic fluctuations.
  
• Economic uncertainty and credit risks may hurt First Horizon’s revenue, net interest margins, and earnings as market volatility and potential recession loom.

Catalysts

Operates as the bank holding company for First Horizon Bank that provides various financial services.

• First Horizon is managing interest-bearing deposit costs effectively, with a 38 basis point reduction, which could lead to net interest margin expansion and positively impact net interest income.
  
• The company has opportunities for organic loan growth, particularly through its mortgage warehouse segment, which may enhance overall earnings if economic conditions or rate cuts increase demand.
  
• First Horizon's strategic capital deployment through a share repurchase program may lead to higher earnings per share (EPS) as outstanding shares are reduced.
  
• Increased focus on cost discipline and expense management can potentially improve net margins and bolster pre-provision net revenue growth.
  
• The diversified business model, offering countercyclical revenue support, may shield earnings from macroeconomic volatility and ensure a steady revenue stream across various interest rate environments.

First Horizon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Horizon's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.2% today to 25.8% in 3 years time.
• Analysts expect earnings to reach $975.1 million (and earnings per share of $2.0) by about April 2028, up from $767.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $855.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, down from 11.3x today. This future PE is greater than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

First Horizon Future Earnings Per Share Growth

Risks

• The economic environment is currently shaped by heightened macroeconomic uncertainty due to tariffs and related policies, which could negatively impact revenue and net interest margins as market volatility persists.
  
• The risk of a potential recession is acknowledged, as further macroeconomic uncertainty is reflected in increased provision expenses and the potential impact on earnings and credit performance.
  
• The provision expense increased by $30 million, and the ACL to loans ratio increased by 2 basis points, which indicates caution over possible credit losses and may negatively affect future net margins and earnings.
  
• There is a decrease in fee income, excluding deferred compensation, by $5 million, and a decline in loan yields could continue to pressure revenues and profitability.
  
• The net charge-offs increased by $16 million, which, coupled with potential further macroeconomic challenges, could put additional stress on credit quality and earnings performance.

Valuation

• The analysts have a consensus price target of $21.6 for First Horizon 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 $24.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $975.1 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 6.2%.
• Given the current share price of $17.08, the analyst price target of $21.6 is 20.9% 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.