Population Growth In Texas And Oklahoma Will Create Future Opportunities

Key Takeaways

• Strategic measures like avoiding broker deposits and stock repurchases aim to bolster shareholder value and maintain strong capital standing.
  
• Growth in Texas and Oklahoma, coupled with strategic acquisitions, could boost loan demand, aiding long-term revenue and earnings expansion.
  
• Economic uncertainty, regulatory changes, and interest rate volatility pose risks to loan growth, revenue, and long-term strategic opportunities for Prosperity Bancshares.

Catalysts

Operates as bank holding company for the Prosperity Bank that provides financial products and services to businesses and consumers.

• Improvements in net interest margin as assets reprice could drive increased earnings, with expectations of exiting the year at a 3% net interest margin and potentially reaching 3.27% in 2025, impacting revenue and earnings positively.
  
• The anticipated stabilization and potential decrease in deposit costs, as CDs mature and reprice, should support net interest income and net margins.
  
• Continued strategic moves, including avoiding broker deposits and opportunistic stock repurchases, could enhance shareholder value while maintaining a solid capital position, affecting earnings.
  
• Growth opportunities in Texas and Oklahoma due to population influx and business relocations could lead to increased loan demand, positively impacting revenue.
  
• Potential for strategic acquisitions, in light of industry consolidation and regulatory pressures, could enhance long-term growth prospects and increase earnings and shareholder value.

Prosperity Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prosperity Bancshares's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 38.7% today to 44.4% in 3 years time.
• Analysts expect earnings to reach $665.5 million (and earnings per share of $7.12) by about December 2027, up from $444.8 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 14.7x on those 2027 earnings, down from 16.8x today. This future PE is greater than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.14%, as per the Simply Wall St company report.

Prosperity Bancshares Future Earnings Per Share Growth

Risks

• Loan growth has been affected by higher interest rates and customer uncertainty, leading to low single-digit growth expectations, which may negatively impact revenue.
  
• The net interest margin improvements rely on rate cuts and favorable repricing conditions, which are uncertain, potentially affecting earnings if the environment changes unfavorably.
  
• The company has a significant proportion of borrowings, which could pressure net interest margins if interest rate reductions do not occur as anticipated or if further tightening occurs.
  
• The runoff of acquired loans could continue to be a headwind to loan growth in the short term, which can affect net income and revenue growth.
  
• Regulatory changes, election outcomes, and economic conditions could affect strategic M&A opportunities, impacting long-term growth prospects and potentially affecting earnings stability.

Valuation

• The analysts have a consensus price target of $87.79 for Prosperity 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 $102.0, and the most bearish reporting a price target of just $77.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.5 billion, earnings will come to $665.5 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 6.1%.
• Given the current share price of $78.42, the analyst's price target of $87.79 is 10.7% 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.