Operational Efficiencies And Tax Strategies Will Improve Future Prospects

Key Takeaways

• Strategic financial adjustments and efficient lending practices are likely to enhance net margins, earnings, and revenues over time.
  
• Tax strategies and subsidiary formation are anticipated to reduce tax rates, benefiting net income.
  
• SmartFinancial's reliance on costly brokered funding and exposure to rate changes may impact interest income growth and margin stability amid asset quality concerns.

Catalysts

Operates as the bank holding company for SmartBank that provides various financial services to individuals and corporate customers in Tennessee, Alabama, and Florida.

• SmartFinancial is leveraging operating leverage as they grow their revenue line with minimal expense growth, which should positively impact net margins and earnings.
  
• The company’s strategic decision to reposition funding, exiting high-cost public fund relationships and leveraging liquidity positions, is expected to enhance net interest income and improve net interest margins.
  
• Anticipated consistent margin expansion into 2025, driven by new loan production and favorable yield conditions, suggests potential for improved earnings and revenues.
  
• The implementation of a tax strategy and formation of a real estate investment trust subsidiary is expected to reduce the future corporate effective tax rate, providing a positive tailwind for net income.
  
• Strong regional sales team performance and ongoing client acquisition efforts are projected to sustain loan growth, positively impacting revenue and potentially driving future earnings.

SmartFinancial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SmartFinancial's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.5% today to 23.2% in 3 years time.
• Analysts expect earnings to reach $52.3 million (and earnings per share of $3.07) by about December 2027, up from $32.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $43.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2027 earnings, down from 17.3x 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 grow by 0.25% 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.

SmartFinancial Future Earnings Per Share Growth

Risks

• The company's decision to reduce exposure to a large public fund relationship in favor of more cost-effective brokered funding suggests dependency on temporary measures which could impact the steady growth of interest income over time.
  
• Elevated quarterly provision expenses and slight increase in charge-offs, particularly from the Equipment Finance division, could indicate underlying asset quality concerns, potentially impacting net earnings.
  
• Expectations for consistent margin expansion are sensitive to market conditions and potential Federal Reserve rate cuts, introducing uncertainties regarding future net interest margins.
  
• The reliance on temporary brokered deposits, which are more costly and sensitive to interest rate changes, to fill funding gaps may affect cost stability and net margins.
  
• The strategic decision to exit a costly fund relationship and replace it with brokered funding, combined with plans to hold noninterest-bearing deposit mix, could pressure revenue streams if deposit growth does not materialize as projected.

Valuation

• The analysts have a consensus price target of $34.54 for SmartFinancial 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 $38.25, and the most bearish reporting a price target of just $29.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $225.6 million, earnings will come to $52.3 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 5.9%.
• Given the current share price of $33.39, the analyst's price target of $34.54 is 3.3% 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.