Automation And Diversified Lending Will Strengthen Operational Efficiency

Key Takeaways

• Strong loan growth and strategic pricing discipline are expected to drive revenue growth and margin expansion, outweighing expenses.
  
• Diversification in lending and technology investments provide credit stability and competitive advantages, enhancing future earnings potential.
  
• Elevated provision expenses, regulatory changes, and economic uncertainties may impact Live Oak Bancshares' profitability, credit quality, and revenue stability amid reliance on government-guaranteed loans.

Catalysts

Operates as the bank holding company for Live Oak Banking Company that provides various banking products and services in the United States.

• Strong loan and deposit growth, including the Live Oak Express small dollar SBA loan program and increased customer relationships, is expected to continue driving revenue growth significantly above expenses. This impacts revenue and net margins.
  
• The diversification of the lending portfolio, with a significant portion being government guaranteed loans, provides high credit quality and stability, which gives confidence in maintaining healthy net margins.
  
• The company is expecting margin expansion supported by strong pricing discipline in loan production, expected favorable repricing of CDs, and strategic management of funding costs, positively impacting net interest income and net margins.
  
• The integration of technology, such as automation for small-dollar SBA loans, aims to maintain or increase profitability despite traditional underwriting requirements, impacting earnings.
  
• Investments in initiatives like Live Oak Express, a new technology platform, and expanded small business lending activities are anticipated to provide competitive advantages and operational efficiencies, contributing to future revenue and earnings growth.

Live Oak Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Live Oak Bancshares's revenue will grow by 34.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.9% today to 27.7% in 3 years time.
• Analysts expect earnings to reach $268.2 million (and earnings per share of $5.8) by about April 2028, up from $59.6 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 6.6x on those 2028 earnings, down from 20.5x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 1.38% 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.

Live Oak Bancshares Future Earnings Per Share Growth

Risks

• Elevated provision expenses continue to weigh down current profitability due to high loan growth, which impacts net income and earnings.
  
• The uncertain economic environment, including factors such as inflation, interest rate fluctuations, and potential government actions, increases the risk of loan defaults, impacting credit quality and net margins.
  
• Changes in SBA regulations and fees may increase operational complexities and costs, affecting the profitability of SBA loans, which are a significant part of the bank's loan portfolio and revenue stream.
  
• Continued reliance on government-guaranteed loans and secondary market sales for revenue introduces risk if demand for such loans diminishes or if government policies change, impacting revenue stability.
  
• The challenging small business credit environment and the potential impact of tariffs and other macroeconomic pressures could lead to increased credit losses, affecting the financial health of the bank and net earnings.

Valuation

• The analysts have a consensus price target of $31.5 for Live Oak Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $967.2 million, earnings will come to $268.2 million, and it would be trading on a PE ratio of 6.6x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $26.75, the analyst price target of $31.5 is 15.1% 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.