Innovative Lending And Technology Fuels Rapid Growth Amid Economic Shifts

Key Takeaways

• Expansion into new verticals and ramping up small dollar SBA lending are significant for revenue growth, alongside investments in technology enhancing efficiency.
  
• Solid credit quality management and strong deposit growth, especially in business deposits, underpin sustainability and potential improvement in net interest margins.
  
• Reliance on external economic factors, operating cost concerns, competitive pressures, pricing strategy vulnerabilities, and interest rate sensitivities pose significant risks to financial performance.

Catalysts

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

• A significant increase in loan production and pipeline to all-time highs, indicating continued strong demand for the company's lending services, is expected to fuel further growth in loan balances and interest income.
  
• The expansion of new verticals and products, including the small dollar SBA lending effort, which is ramping up quickly, is likely to contribute meaningfully to revenue growth over time.
  
• Continuous investment in innovative technology and partnerships to enhance operational efficiency and customer service, ultimately supporting revenue growth and possibly improving net margins through cost efficiencies.
  
• Solid credit quality management and proactive provisioning for loan growth and potential impairments, ensuring the company remains well-reserved against charge-offs, which supports the stability and growth of net interest margins.
  
• Strong deposit growth, particularly in business deposits, fueled by a competitive customer deposit platform, which is critical for funding loan growth sustainably and might contribute to maintaining or improving the net interest margin by managing funding costs effectively.

Assumptions

• Analysts are assuming Live Oak Bancshares's revenue will grow by 19.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.9% today to 23.8% in 3 years time.
• Analysts expect earnings to reach $173.1 million (and earnings per share of $3.69) by about September 2027, up from $110.5 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 16.5x on those 2027 earnings, down from 19.8x today. This future PE is greater than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 1.52% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The reliance on Federal Reserve rate cuts to achieve net interest margin (NIM) targets indicates that external economic factors could significantly impact net interest income and margin expansion.
  
• Ongoing investments in technology and new lending teams, despite efforts to balance expenses, suggest that operating costs may increase, potentially outpacing revenue growth, which could impact net margins.
  
• Competition in the Small Business Administration (SBA) lending space remains stable, but any increase in competition could reduce market share and loan origination volume, affecting revenue growth.
  
• The strategy to maintain high pricing discipline on loan originations for higher secondary market premiums could be challenged by changing market conditions, impacting the ability to sell loans at expected premiums and affecting revenue.
  
• The CD portfolio's repricing dynamics, with a portion maturing each quarter, suggest sensitivity to interest rate changes. If deposit rates do not adjust favorably post-Fed rate cuts, it could affect cost of funds and net interest margin.

Valuation

• The analysts have a consensus price target of $51.25 for Live Oak 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 $57.0, and the most bearish reporting a price target of just $46.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $728.1 million, earnings will come to $173.1 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $48.62, the analyst's price target of $51.25 is 5.1% 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.