European Expansion And New Lending Verticals Will Create Future Business Opportunities

Key Takeaways

• Expanding lending verticals and European operations positions Trinity Capital for future revenue growth and international market penetration.
  
• Aligning interests with shareholders and diversifying income through RIA business enhances operational efficiency and reduces leverage for increased earnings.
  
• Trinity Capital's concentrated sector strategy and reliance on specific financing may expose it to market fluctuations, impacting net margins, credit quality, and future earnings.

Catalysts

A business development company specializing in term loans, equipment financing, and private equity-related investments.

• The launch of Trinity Capital's sponsor finance and asset-backed lending verticals expands their business opportunities and is expected to positively impact future revenue by tapping into private equity-backed businesses and providing diverse lending solutions.
  
• The establishment of a London-based team for European expansion presents growth potential that could lead to increased revenue streams from international markets.
  
• Trinity Capital's internally managed BDC structure aligns employee and management interests with shareholders, potentially improving net margins through efficient scalability and operational alignment.
  
• The continued growth and scaling of their Registered Investment Adviser (RIA) business for managing third-party capital is expected to enhance earnings by diversifying income sources and decreasing leverage over time.
  
• Strategic investments and a strong pipeline, with $693 million in unfunded commitments, are set to drive future growth, thereby increasing net investment income and potentially boosting earnings.

Trinity Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Trinity Capital's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 51.0% today to 46.9% in 3 years time.
• Analysts expect earnings to reach $124.4 million (and earnings per share of $1.91) by about March 2028, up from $115.6 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 12.9x on those 2028 earnings, up from 8.7x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.49%, as per the Simply Wall St company report.

Trinity Capital Future Earnings Per Share Growth

Risks

• Trinity Capital's investment strategy includes high exposure to specific sectors like finance, life sciences, and green technology, which may increase vulnerability to sector-specific downturns, potentially impacting revenue and net margins.
  
• The company's focus on leverage around 1:1 and efforts to raise capital through ATMs may pressure financial flexibility, influencing net margins and earnings if market conditions shift unfavorably for capital raising.
  
• While the company has minimized nonaccruals, the sector-specific concentration—such as in fintech—relies on relationships with banks, presenting risk if partnerships deteriorate, potentially affecting credit quality and revenues.
  
• A significant portion of Trinity Capital's investments is in secured loans and equipment financing, which may face value adjustments if asset prices fluctuate adversely, impacting the net asset value and earnings.
  
• The RIA business's nascent stage may not immediately yield substantial returns, and execution risks exist in capturing external fee income, affecting overall earnings contributions and future revenue projections.

Valuation

• The analysts have a consensus price target of $16.5 for Trinity Capital 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 $18.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $265.1 million, earnings will come to $124.4 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 8.5%.
• Given the current share price of $16.07, the analyst price target of $16.5 is 2.6% 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.