Reinvestments And Operational Efficiencies Will Strengthen Future Prospects

Key Takeaways

• Strategic restructuring and deposit repricing could sustain net margins and boost revenue growth, despite potential interest rate declines.
  
• Focus on loan growth and cost management supports improved earnings and aids shareholder value through share repurchases.
  
• Restructuring, rising rates, and slow real estate growth expose First Horizon to short-term risks, impacting margins, credit quality, and net interest income.

Catalysts

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

• First Horizon's strategic restructuring of its securities portfolio, reinvesting at significantly higher yields, is expected to deliver an incremental annual impact of $35 million to net interest income, positively influencing future revenue growth.
  
• Continued efforts in repricing deposits are expected to maintain attractive net interest margins, despite potential declining interest rates, thus potentially improving net margins.
  
• The current momentum in loan growth, particularly in the higher-yielding mortgage company segment, indicates a potential boost in future earnings, supported by the bank's ability to retain and attract new clients.
  
• The company's focus on operational efficiencies and cost management amidst ongoing technology investments is expected to limit expense growth to 2-4%, aiding the improvement of net margins.
  
• First Horizon's commitment to share repurchases suggests a strategy to enhance EPS and shareholder value, aided by substantial capital returns to shareholders.

First Horizon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Horizon's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.3% today to 27.5% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $2.15) by about January 2028, up from $739.0 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 12.9x on those 2028 earnings, down from 15.1x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 3.33% 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.

First Horizon Future Earnings Per Share Growth

Risks

• The restructuring of First Horizon's securities portfolio resulted in a $69 million after-tax loss, which, while expected to improve yields and long-term interest income, indicates current vulnerability to market risks, impacting net margins and earnings in the short term.
  
• Non-performing loans increased, driven by higher interest rates and slower lease-ups in the multifamily sector, posing risks to credit quality and potential impacts on net charge-offs and loan loss provisions in the future.
  
• The bank's commercial real estate portfolio experienced payoffs, suggesting limited growth prospects in this segment that may affect overall loan growth and revenue generation.
  
• The expectation of flat to marginal revenue growth, combined with guided expense increases, indicates potential pressures on net margins and profitability, especially if macroeconomic conditions worsen or if anticipated revenue-generating opportunities do not materialize.
  
• Market dynamics and competitive pressures in deposit pricing could negate efforts to improve net interest margins, especially in a volatile interest rate environment, affecting revenue from net interest income.

Valuation

• The analysts have a consensus price target of $23.2 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 $25.0, 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 $3.7 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 6.1%.
• Given the current share price of $21.29, the analyst's price target of $23.2 is 8.2% 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.