- If you are wondering whether First Merchants at around US$36.55 is offering good value today, you are not alone. This article will walk through what the current price may be implying.
- The stock has seen mixed returns, with a 5.2% decline over the last 7 days and a 12.5% decline over the last 30 days, while the 3 year return sits at 11.9% and the 1 year return at a 2.9% decline.
- Recent trading moves have put more attention on how investors are pricing regional banks like First Merchants and what risks or opportunities might be getting more weight in the market. This context makes it a useful time to compare the market price with different ways of estimating what the shares could reasonably be worth.
- On Simply Wall St's valuation checks, First Merchants scores 6 out of 6 for being assessed as undervalued. You can see that full breakdown in the valuation score of 6, which sets us up to look at several valuation approaches next and then finish with a broader way to think about what that valuation really means for you.
Find out why First Merchants's -2.9% return over the last year is lagging behind its peers.
Approach 1: First Merchants Excess Returns Analysis
The Excess Returns model looks at how much profit a company is expected to generate above the return that shareholders require, and then links that to the value of its equity. Instead of focusing on cash flows, it uses earnings, book value and the cost of equity to estimate what each share could be worth.
For First Merchants, the model starts with a Book Value of $42.87 per share and a Stable EPS of $4.52 per share, based on weighted future Return on Equity estimates from 5 analysts. The implied Cost of Equity is $3.26 per share, so the Excess Return is $1.27 per share. That excess is supported by an Average Return on Equity of 9.69% and a Stable Book Value estimate of $46.65 per share, sourced from 6 analysts.
When these inputs are run through the Excess Returns framework, Simply Wall St calculates an intrinsic value of about $82.12 per share. Compared with a current price around $36.55, this indicates the stock is 55.5% undervalued according to this model.
Result: UNDERVALUED
Our Excess Returns analysis suggests First Merchants is undervalued by 55.5%. Track this in your watchlist or portfolio, or discover 47 more high quality undervalued stocks.
Approach 2: First Merchants Price vs Earnings
For a profitable company like First Merchants, the P/E ratio is a useful way to think about value because it links what you are paying directly to the earnings the bank is currently generating. Investors typically accept a higher or lower P/E depending on what they expect for future growth and how much risk they see in those earnings.
First Merchants is trading on a P/E of 10.34x. That sits below the Banks industry average P/E of 11.23x and below the peer group average of 13.40x. On the surface, that suggests the market is placing a lower multiple on First Merchants earnings than on many comparable banks.
Simply Wall St also uses a proprietary “Fair Ratio” to estimate what P/E might make sense for a company given factors such as its earnings growth profile, industry, profit margins, market cap and specific risks. This Fair Ratio, at 12.40x for First Merchants, goes beyond a simple peer or industry comparison because it adjusts for the company’s own characteristics rather than assuming all banks deserve the same multiple. Comparing that Fair Ratio of 12.40x with the current P/E of 10.34x points to the shares trading below this model derived level.
Result: UNDERVALUED
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Upgrade Your Decision Making: Choose your First Merchants Narrative
Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, which simply means you write a clear story about First Merchants, link that story to specific forecasts for revenue, earnings and margins, then see what fair value falls out and compare it with today’s price.
On Simply Wall St’s Community page, Narratives are an easy tool that millions of investors use to capture their own view of a company and translate it into numbers. Instead of only looking at a P/E or analyst target, you directly connect your expectations for things like First Merchants revenue growth of 7.4% a year, a profit margin path from 35.0% to 28.1%, and a possible future P/E of 14.2x to an implied fair value that you can constantly compare with the live share price.
Because Narratives refresh when new earnings, news or risks emerge, one investor might see the analysts’ fair value of about US$46.83 as reasonable. Another might plug in more cautious assumptions about Midwest loan demand, funding mix or digital progress and land on a lower figure. That difference in fair values helps each of them decide for themselves whether the current price around US$40.22 looks attractive, neutral or expensive without anyone needing to predict outcomes for them.
Do you think there's more to the story for First Merchants? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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