Profit Margins Under Pressure Despite Expanding Revenue And Strategic Merger Ambitions

Key Takeaways

• The merger with The First could enhance market position and growth through synergies, while core deposit growth strategies may improve net interest margins.
  
• Focus on asset quality and nonbank opportunities suggests a strategy to protect margins, diversify income, and emphasize strategic loan growth.
  
• The merger, strong deposit growth, and capital raises solidify Renasant's financial position and support future growth and profitability initiatives.

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 merger with The First is expected to close in the first half of 2025, which could enhance Renasant's market position and provide synergies that contribute to future revenue growth.
  
• Continued emphasis on core deposit growth, alongside strategic pricing, could improve Renasant's net interest margins by maintaining low deposit costs amidst a competitive environment.
  
• Increased focus on deposit generation ahead of potential rate cuts could provide liquidity optionality and support strategic loan growth, potentially improving net interest income.
  
• Renasant's cautious approach to asset quality, particularly in stressed asset classes like senior housing and non-medical office loans, suggests a focus on maintaining reserve adequacy to limit future credit losses and protect net margins.
  
• Successful integration of nonbank deals and potential team lift-outs highlight opportunities to expand noninterest income and diversify revenue streams, aligning with overall earnings growth.

Renasant Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Renasant's revenue will grow by 23.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.1% today to 25.6% in 3 years time.
• Analysts expect earnings to reach $331.2 million (and earnings per share of $2.72) by about November 2027, 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 17.1x on those 2027 earnings, up from 13.0x today. This future PE is greater than the current PE for the US Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 24.14% 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 merger with The First is progressing well, with regulatory approvals expected soon and shareholders from both companies having approved the merger. This could lead to increased scale and potentially higher revenues and earnings.
  
• The successful sale of Renasant's insurance agency resulted in a significant after-tax gain, contributing positively to reported earnings, which could support future profitability and strengthen their financial position.
  
• Core deposit growth has been strong, allowing Renasant to reduce reliance on non-core funding sources. This could help maintain or improve net interest margins and overall earnings in the future.
  
• Renasant's balance sheet is expected to be significantly strengthened by proceeds from recent capital raises and upcoming mergers, providing liquidity and capital to support future growth initiatives and potentially improve profitability.
  
• A well-capitalized position, with all regulatory capital ratios in excess of required minimums, provides Renasant with a solid foundation for risk management and strategic opportunities, potentially supporting long-term earnings stability.

Valuation

• The analysts have a consensus price target of $39.5 for Renasant 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 2027, revenues will be $1.3 billion, earnings will come to $331.2 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of $36.56, the analyst's price target of $39.5 is 7.4% 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.