Texas Economic Growth Will Fuel Bank Expansion Opportunities

Key Takeaways

• Stock repurchase program may boost EPS and support share price if undervalued, with strategic M&A opportunities leveraging strong capital for expansion.
  
• Expanding NIM and organic loan growth potential driven by positive economic factors in Texas and Oklahoma could enhance revenue and earnings.
  
• Heavy reliance on mergers for growth and economic uncertainties pose risks to revenue, while low yields and rising rates affect earnings.

Catalysts

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

• The company has announced a stock repurchase program, allowing for the acquisition of up to 5% of outstanding common stock, which could lead to an increase in earnings per share (EPS) and provide support for the stock price if it is perceived as undervalued.
  
• Prosperity Bancshares expects its net interest margin (NIM) to continue expanding as assets reprice, driven by the repricing of fixed and maturing loans, positively impacting net interest income and overall earnings.
  
• There is potential for organic loan growth in 2025, spurred by positive customer sentiment post-election and economic strength in Texas and Oklahoma, which could lead to increased revenue.
  
• The company is well-positioned for mergers and acquisitions, with strong capital that doesn't require additional capital raising, suggesting potential for business expansion and increased earnings.
  
• An anticipated economic tailwind from Texas' population growth and business-friendly environment could contribute to asset growth and increased revenue for the bank.

Prosperity Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prosperity Bancshares's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 40.5% today to 44.9% in 3 years time.
• Analysts expect earnings to reach $676.9 million (and earnings per share of $7.32) by about March 2028, up from $479.4 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 14.8x on those 2028 earnings, up from 14.0x today. This future PE is greater than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to decline by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.36%, as per the Simply Wall St company report.

Prosperity Bancshares Future Earnings Per Share Growth

Risks

• The net interest margin and revenue could be impacted by their heavy reliance on static balance projections and no guaranteed loan growth, alongside potential shrinkages due to borrowing pay downs.
  
• Loan growth concerns arise since, without merger activity, there was essentially no organic loan growth. This reliance on mergers to drive growth could pose a risk to sustained revenue growth.
  
• Asset quality poses some risk with nonperforming assets slightly increasing from the previous year, which could affect future net margins.
  
• The securities portfolio has a low yield and rising interest rates could continue to result in unrealized losses, thus affecting the overall earnings.
  
• Economic uncertainties, such as reliance on favorable regulatory environments for M&A activity and the Texas and Oklahoma economic outlook, could impact the company's revenue or earnings projections if conditions change.

Valuation

• The analysts have a consensus price target of $89.333 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 $98.0, and the most bearish reporting a price target of just $79.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $676.9 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 6.4%.
• Given the current share price of $70.62, the analyst price target of $89.33 is 20.9% 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.