First Merchants’s 11.3% return over the past six months has outpaced the S&P 500 by 5%, and its stock price has climbed to $42.59 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy First Merchants, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is First Merchants Not Exciting?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons why FRME doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
In general, banks make money from two primary sources. The first is net interest income, which is interest earned on loans, mortgages, and investments in securities minus interest paid out on deposits. The second source is non-interest income, which can come from bank account, credit card, wealth management, investment banking, and trading fees.
Regrettably, First Merchants’s revenue grew at a tepid 7.3% compounded annual growth rate over the last five years. This fell short of our benchmark for the banking sector.
2. Net Interest Income Points to Soft Demand
Net interest income commands greater market attention due to its reliability and consistency, whereas one-time fees are often seen as lower-quality revenue that lacks the same dependable characteristics.
First Merchants’s net interest income has grown at a 7.5% annualized rate over the last five years, worse than the broader banking industry and in line with its total revenue. Its growth was driven by both an increase in its outstanding loans and net interest margin, which represents how much a bank earns in relation to its outstanding loan book.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
First Merchants’s weak 5.6% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
Final Judgment
First Merchants isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 0.9× forward P/B (or $42.59 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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