HOMB - Home Bancshares: Top Line Growth Appears Priced In

Summary

• Loan growth will likely remain positive in the coming quarters, thanks to satisfactory economic activity and tight labor markets.
• The margin will likely continue to expand in the coming quarters due to the rise in interest rates. A high deposit beta will constrain the margin expansion.
• The December 2023 target price suggests a small upside from the current market price. Further, HOMB is offering a decent dividend yield.

Earnings of Home Bancshares, Inc. (Conway, AR) ( HOMB ) will benefit from slight margin expansion in the coming quarters amid a rising rate environment. Further, subdued loan growth will likely offer some support to the bottom line. Overall, I'm expecting Home Bancshares to report adjusted earnings of $1.89 per share for 2022, down 2.6% year-over-year. Compared to my last report on the company, I've slightly reduced my earnings estimate as I've decreased my topline estimate. For 2023, I'm expecting the company to report earnings of $2.07 per share. Next year's target price suggests a small upside from the current market price. Therefore, I'm maintaining a hold rating on Home Bancshares.

Positive Loan Trend Likely

Home Bancshares’ loan portfolio declined by 0.7% sequentially in the third quarter, following the Happy Bancshares acquisition in the second quarter of 2022. This reduction in the third quarter is not surprising as some payoffs are natural after M&A transactions. Further, the management mentioned in the third quarter’s conference call that there were some payoffs in the legacy commercial real estate portfolio.

However, the portfolio’s decline drives home the point that Home Bancshares’ management isn't good at organic growth. The loan portfolio has declined every quarter from June 2020 till December 2021. Even in 2019, the loan portfolio shrank in size, which is far from ideal.

Going forward, I believe Home Bancshares will manage to achieve positive loan growth, partly because of strong job markets. Home Bancshares mainly operates in Arkansas, Florida, and Texas, with a limited presence in southern Alabama and New York City. Due to the large difference between the economies of these regions, it's appropriate to take the national average. As shown below, the national unemployment rate is near multi-decade lows.

Additionally, the coincident index points towards satisfactory economic activity in the country.

As mentioned in the conference call, the management expects the pay downs to decline in October and November but rise again by the year's end. Overall, the management expects the loan growth to be flat to up in the last quarter of 2022.

Considering the factors given above and management's guidance, I'm expecting the loan portfolio to grow by 0.50% every quarter till the end of 2023. This will lead to loan growth of 41.8% for 2022 and 2.0% for 2023. In my last report on Home Bancshares, I estimated loan growth of 43.4% for 2022. I've decided to reduce my loan growth estimate for the year due to the third quarter's performance.

Meanwhile, I'm expecting other balance sheet items to grow somewhat in line with loans. The following table shows my balance sheet estimates.

In my last report, I estimated GAAP earnings of $1.55 per share for 2022. I've reduced my earnings estimate mostly because I've tweaked downwards both my loan growth and margin estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

Next Year’s Target Price is Close to the Current Market Price

Home Bancshares has a long-standing tradition of increasing its quarterly dividend every year. Given the earnings outlook, it’s likely that the company will maintain the dividend trend next year. Therefore, I’m expecting the company to increase its quarterly dividend to $0.18 per share in the first quarter of 2023. The earnings and dividend estimates suggest a payout ratio of 35% for 2023, which is in line with the five-year average. Based on my dividend estimate, Home Bancshares is offering a forward dividend yield of 3.0%.

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 2.23 in the past, as shown below.

The stock has traded at an average P/E ratio of around 12.3x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $25.5 , which implies a 6.7% upside from the current market price. Adding the forward dividend yield gives a total expected return of 9.5%. This total expected return is not high enough for me; therefore, I'm maintaining a hold rating on Home Bancshares.

For further details see: