Q1 earnings jolt puts Merchants Bancorp (MBIN) under the spotlight

Merchants Bancorp (MBIN) released Q1 results with revenue in line with expectations but weaker net interest income, alongside record assets and record tangible book value per share, and the stock dropped about 9% after the report.

The Q1 earnings drop came after a strong run, with the share price up 38.73% year to date and a 45.42% total shareholder return over the past year. This suggests longer term momentum remains positive, even as the recent 30 day share price return fell 7.74%.

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With the stock down after Q1 yet still showing strong 1 year and multi year returns, and trading about 12% below the average analyst price target, should you view MBIN as undervalued, or is the market already accounting for future growth?

Price-to-earnings of 10.9x: Is it justified?

On a P/E of 10.9x, Merchants Bancorp looks cheaper than both its diversified financial peers at 12.4x and the broader US diversified financial industry at 17.6x, even after the recent share price pullback.

The P/E ratio compares the share price with earnings per share and, for a profitable bank with customer deposits, it is a common way to gauge how the market is pricing current and expected profits. With MBIN, that 10.9x multiple sits alongside high quality earnings and a history of earnings growth of 2.3% per year over the past 5 years, although earnings declined 24% over the past year and net profit margins moved from 39.9% to 32.2%.

Compared with peers, the gap is clear. The stock trades below both the peer average P/E of 12.4x and the US diversified financial industry average of 17.6x, and also below an estimated fair P/E of 14.8x that the SWS model suggests the market could move toward if sentiment and fundamentals align more closely.

Result: Price-to-earnings of 10.9x (UNDERVALUED)

However, still keep an eye on weaker net interest income and the recent margin pressure, as any sustained squeeze on profitability could challenge the current valuation story.

Another way to look at value

While the 10.9x P/E suggests MBIN looks cheaper than peers and its industry, the SWS DCF model points to a very different picture. At a share price of $44.67 versus an estimated future cash flow value of $135.08, the stock screens as heavily undervalued. Which signal do you trust more: earnings today or long term cash flows?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Merchants Bancorp for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 53 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With mixed signals on value and sentiment, it helps to look past the headline numbers, review the details, and then decide where you stand using the 3 key rewards and 3 important warning signs

Looking for more investment ideas?

If MBIN is on your watchlist, do not stop there. A few minutes with targeted stock ideas can quickly broaden your options and sharpen your decisions.

• Spot potential value opportunities early by reviewing the 53 high quality undervalued stocks to find combinations of solid fundamentals and attractive pricing signals.
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• Hunt for quality beyond the usual large caps by using the screener containing 21 high quality undiscovered gems to highlight lesser known stocks with strong underlying numbers.

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.