Merger With First Will Increase Share Dilution And Raise Valuation Risks

Key Takeaways

• The merger with First is expected to strengthen Renasant's financial position and drive increased revenue and improved net margins.
  
• Strong core deposit growth and operational efficiencies are anticipated to enhance net interest margin and support earnings growth.
  
• Strong loan and deposit growth, strategic merger, and robust capital position boost Renasant's profitability, financial stability, and resilience to interest rate changes.

Catalysts

Operates as a bank holding company for Renasant Bank that provides a range of financial, wealth management, fiduciary, and insurance services to retail and commercial customers.

• The upcoming merger with First is anticipated to enhance Renasant's balance sheet and earnings profile, which could lead to increased revenue and improved net margins as the company becomes a stronger regional player in the Southeast.
  
• Renasant's ability to maintain strong core deposit growth while reducing reliance on non-core funding sources is expected to benefit their net interest margin and overall financial stability, providing a foundation for improved earnings.
  
• The bank's proactive management and resolution of underperforming loans, as well as strong credit performance, are likely to bolster asset quality metrics, supporting better net margins and earnings growth.
  
• Expected operational efficiencies and reduced costs following the integration of First could potentially improve net margins despite additional merger-related expenses anticipated in 2025.
  
• The regulatory environment may become more favorable, which could lower operational costs and potentially enhance revenue growth opportunities as Renasant leverages regulatory changes to streamline its business operations.

Renasant Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Renasant's revenue will grow by 23.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.1% today to 25.2% in 3 years time.
• Analysts expect earnings to reach $322.1 million (and earnings per share of $2.73) by about January 2028, up from $178.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $219.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, up from 13.3x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 22.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Renasant Future Earnings Per Share Growth

Risks

• The company has experienced strong loan growth, disciplined pricing, and steady credit performance, positioning it for continued growth and success, which could lead to higher net margins and revenues.
  
• The merger with First is anticipated to be completed in the first half of 2025, which is expected to meaningfully strengthen Renasant's balance sheet and earnings profile, potentially boosting earnings.
  
• Renasant reported solid deposit growth and a decrease in deposit costs while maintaining loan yields, which positively impacts net interest margins and overall profitability.
  
• The variable rate loan book is significant and is expected to reprice within a month, suggesting resilience against interest rate changes that could stabilize earnings.
  
• Regulatory capital ratios are well above minimum requirements, indicating a robust capital position that could support future growth and mitigate risks, benefiting financial stability and assets.

Valuation

• The analysts have a consensus price target of $41.17 for Renasant 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 $45.0, and the most bearish reporting a price target of just $37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $322.1 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $37.45, the analyst's price target of $41.17 is 9.0% 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.