HOMB - Home Bancshares: Stable Earnings Attractive Valuation

2023-10-17 15:53:56 ET

Summary

• After poor performance in the first half of the year, the loan trend is likely to have turned around in the second half of the year due to macroeconomic factors.
• Further margin expansion is likely due to a lagged effect of recent rate hikes and shift in treasury yields.
• The December 2023 target price suggests a high upside from the current market price. Further, HOMB is offering a modest dividend yield.
• Recent measures have successfully reduced HOMB’s risk level.

Earnings of Home Bancshares, Inc. (Conway, AR) ( HOMB ) will most probably remain stable through the end of 2024. Subdued loan growth and slight margin expansion will likely support earnings, while a normal growth in expenses will restrict earnings. Overall, I’m expecting Home Bancshares to report earnings of $2.03 per share for 2023 and $2.04 per share for 2024. The year-end target price suggests a high upside from the current market price. Hence, I’m maintaining a buy rating on Home Bancshares.

Loan Trend Likely to be Better in the Second Half Compared to the First Half of the Year

Home Bancshares’ performance was quite disappointing during the first half of the year because of material balance sheet shrinkage. Deposits decreased by 5.3% while loans declined by 1.6% during the first half. I’m not expecting a further decline because of a recent turnaround in business activity. Though the manufacturing PMI index is still in the contractionary territory (i.e. below 50), it is now much higher than in previous months. Similarly, the PMI services index is indicating better activity than the second quarter of this year.

Home Bancshares’ loans are concentrated in Arkansas, Florida, Texas, Alabama, and New York. The unemployment rates of Alabama, Arkansas, and New York are currently lower than before, while the unemployment rates of Texas and Florida are higher than before. Therefore, the labor markets are presenting a mixed near-term outlook for economic activity, and consequently loan growth.

Considering these factors, I’m expecting the loan portfolio to grow by 0.5% each quarter through the end of 2024. The following table shows my balance sheet estimates.

In my last report, which was issued before the first quarter’s results, I estimated earnings of $2.01 for 2023. My updated earnings estimate hasn’t changed much as the company’s earnings reported so far haven’t surprised me. Further, my outlook hasn’t changed much.

Risks Appear Subdued

Home Bancshares’ riskiness has significantly eased as uninsured deposits were down to 29.0% of total deposits by the end of June 2023 from 50.5% at the end of December 2022 (as mentioned in the second quarter’s 10-Q filing and last year’s 10-K filing ).

Further, unrealized losses on the Available-for-Sale securities portfolio were around 11% of the equity book value balance at the end of June 2023, slightly better than 12% at the end of December 2022.

The loan portfolio also has manageable credit risk. Non-accrual loans were just 0.35% of total loans at the end of June 2023. Overall, I believe Home Bancshares’ risk level is currently low.

Maintaining a Buy Rating

Home Bancshares is offering a dividend yield of 3.4% at the current quarterly dividend rate of $0.18 per share. The earnings and dividend estimates suggest a payout ratio of 35% for both 2023 and 2024, which is in line with the five-year average of 34%. Therefore, I’m not expecting any change in the dividend level.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Home Bancshares. The stock has traded at an average P/TB ratio of 2.24 in the past, as shown below.

The stock has traded at an average P/E ratio of around 12.8x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $25.80 , which implies a 21.1% upside from the current market price. Adding the forward dividend yield gives a total expected return of 24.5%. Hence, I’m maintaining a buy rating on Home Bancshares.

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