On Monday, Piper Sandler adjusted its outlook on First Merchants (NASDAQ: NASDAQ:FRME), reducing the price target from $50.00 to $47.00, while maintaining an Overweight rating on the stock. The firm highlighted First Merchants' promising operational leverage forecast for 2025, which includes a return to mid-single-digit organic loan growth. This growth is expected to support a relatively stable net interest margin (NIM) and is complemented by strong cost management after recent strategic reallocations.
The analyst at Piper Sandler expressed confidence in the bank's future credit quality and commended First Merchants for its accumulating excess capital, which could enable increased shareholder returns or strategic acquisitions. The current market valuation of First Merchants, trading at a 1x-2x discount compared to peers on forward earnings per share and on a price to tangible book value (P/TBV) ratio, was cited as an attractive entry point for investors.
Piper Sandler's reassessment comes with an expectation that First Merchants will continue to outperform in market share and efficiency gains. The firm's projections for First Merchants' operating earnings per share remain unchanged at $0.89 for the fourth quarter of 2024 and are set at $3.60 for the year 2025, with a new estimate of $3.80 for 2026.
The revised price target of $47.00 reflects a 13.0 times multiple on the firm's 2025 earnings estimate, which has been adjusted down by 1.0 times due to lower peer multiples. Despite this adjustment, First Merchants is still expected to command a moderate premium over its peers, which have an average multiple of 12.1 times, acknowledging the bank's solid profitability and earnings growth potential.
In other recent news, First Merchants Corporation reported strong third-quarter earnings for 2024. The company's total assets increased to $18.3 billion and earnings per share (EPS) rose to $0.84, or $0.95 when adjusted for securities sale losses. The imminent sale of five non-core Illinois branches, set to close in December 2024, is projected to provide a gain of $20 million to $25 million, aiding balance sheet restructuring.
Other key developments include a modest annualized loan growth of 0.5%, an improvement in net interest margin by 7 basis points, and an 8.4% increase in non-interest income adjusted for securities loss. Despite a potential impact from Federal Reserve rate cuts on the variable rate portion of the loan portfolio, First Merchants remains optimistic about organic growth in 2025.
The company also highlighted its plan for continued loan growth, particularly in the commercial and industrial and investment real estate segments. Technology investments and a focus on core deposit accounts are expected to support future growth. Additionally, First Merchants is open to acquisitions, particularly in Indiana, Iowa, and Michigan, as part of its growth strategy.
InvestingPro Insights
To complement Piper Sandler's analysis, recent data from InvestingPro offers additional perspective on First Merchants' financial position. The company's P/E ratio of 11.96 and Price to Book ratio of 0.91 as of the last twelve months ending Q3 2024 support Piper Sandler's observation that First Merchants is trading at a discount compared to peers. This valuation could indeed represent an attractive entry point for investors, as suggested in the analysis.
InvestingPro Tips highlight that First Merchants has raised its dividend for 12 consecutive years and has maintained dividend payments for 36 consecutive years. This track record of consistent shareholder returns aligns with Piper Sandler's note on the bank's potential for increased shareholder returns due to accumulating excess capital. The current dividend yield stands at 3.92%, which may be appealing to income-focused investors.
However, it's worth noting that InvestingPro data shows a revenue decline of 10.89% in the last twelve months ending Q3 2024. This contrasts with Piper Sandler's optimistic outlook on mid-single-digit organic loan growth for 2025, suggesting that investors should closely monitor the company's ability to reverse this trend.
For readers interested in a more comprehensive analysis, InvestingPro offers 7 additional tips for First Merchants, providing a deeper understanding of the company's financial health and market position.
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