Tech Investments Will Improve Efficiency And Shareholder Value In US Banks

Key Takeaways

• Strategic focus on client growth and expense discipline may enhance revenue, net margins, and future earnings.
  
• Investment in technology and optimized staffing could lead to improved operational efficiencies and shareholder value.
  
• Economic uncertainty, interest rate fluctuations, and competitive loan growth could threaten First Horizon's profitability and revenue stability.

Catalysts

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

• First Horizon's focus on client growth and retention, along with their ability to maintain expense discipline, could lead to improved revenue and net margins, positively impacting future earnings.
  
• The company's strategic shift towards leveraging countercyclical businesses to balance interest rate sensitivity may help stabilize revenue and enhance net interest income amid varying economic conditions.
  
• Their continued investment in strategic initiatives, including enhancing technology capabilities and optimizing staffing models, suggests potential for improved operational efficiencies and net margins.
  
• The ongoing share repurchase program indicates a commitment to capital return, which could enhance earnings per share and shareholder value over time.
  
• First Horizon's engagement in high-growth Southeastern markets, combined with improved economic outlooks, represents an opportunity for revenue growth and increased market share, potentially boosting future earnings.

First Horizon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Horizon's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.6% today to 26.3% in 3 years time.
• Analysts expect earnings to reach $974.6 million (and earnings per share of $1.99) by about December 2027, up from $757.0 million today. The analysts are largely in agreement about this estimate.
• 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 2027 earnings, down from 14.0x today. This future PE is about the same as the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 2.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.96%, as per the Simply Wall St company report.

First Horizon Future Earnings Per Share Growth

Risks

• Potential economic uncertainty and interest rate fluctuations could pose risks to future revenue and profits, particularly if loan growth remains muted and deposit costs remain high.
  
• There is a risk that margin pressure from higher deposit costs, along with interest rate compression, could negatively impact net interest income and overall profitability.
  
• The bank’s high sensitivity to rate fluctuations, particularly with 59% of loans indexed to short-term rates, could lead to potential margin pressure and lower net interest income if rates continue to decline.
  
• Challenges in loan growth, especially if the market remains competitive and customer investment decisions are delayed, could negatively impact revenue projections.
  
• The reliance on countercyclical businesses to offset declining net interest income introduces variability in fee income, which may impact total revenue if the fixed income business does not perform as expected.

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 $25.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.7 billion, earnings will come to $974.6 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 6.0%.
• Given the current share price of $19.95, the analyst's price target of $21.6 is 7.6% 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.