First Merchants stock has delivered a 54.7% return over the past three years, and the current valuation checks suggest the share price may still sit below an intrinsic value estimate that screens as undervalued. With both the Excess Returns model and the earnings-based multiples pointing in the same direction, the question is how much of that potential is already reflected at around US$43.30.

• A 54.7% three-year return highlights that investors have already seen solid gains, which raises the bar for any further upside to be justified by fundamentals.
• Piper Sandler's recent price target increase and the completed First Savings acquisition may support expectations for stronger earnings power, while integration risks and execution on the larger asset base can still weigh on what investors are willing to pay.
• With a value score of 4 out of 6, First Merchants screens as undervalued on several checks, but the overall picture is a mixed one rather than a clear-cut bargain.

The issue now is whether First Merchants' current discount to the intrinsic value estimate and market multiples leaves enough margin of safety after the recent multi-year gains.

Is First Merchants a Bargain on Excess Returns?

The Excess Returns model looks at how much profit First Merchants can earn above its cost of equity on each dollar of shareholder capital. For First Merchants, the inputs point to steady, bank-like economics rather than aggressive growth assumptions, which helps keep the estimate grounded in current profitability.

The model uses a Book Value of $42.35 per share and a Stable EPS of $4.50 per share, compared with a Cost of Equity of $3.35 per share. That gap translates into an Excess Return of $1.14 per share on an Average Return on Equity of 9.75%, growing into a Stable Book Value of $46.12 per share. Discounting those excess profits back, the Excess Returns valuation lands on an intrinsic value of about $76.80 per share, versus a recent share price around $43.30, which implies the stock is 43.6% undervalued.

Because Piper Sandler recently lifted its price target after the First Savings deal, the current discount suggests the market may still be cautious about how effectively the larger balance sheet will convert into sustained excess returns.

On this Excess Returns view, First Merchants stock currently screens as undervalued relative to the earnings power implied by its book value and return on equity.

Our Excess Returns analysis suggests First Merchants is undervalued by 43.6%. Track this in your watchlist or portfolio, or discover 44 more high quality undervalued stocks.

Is First Merchants Still Cheap on Earnings?

P/E is often a useful cross-check for a bank like First Merchants because earnings are a central driver of how investors evaluate lenders. At around 13.9x, First Merchants' current P/E sits below the peer average of roughly 15.1x and only somewhat above the broader Banks industry average of about 12.2x. This indicates the stock is not priced as aggressively as some closest comparables.

The tailored fair P/E ratio for First Merchants is estimated at 15.7x, which factors in its size, earnings profile and sector risks. Against that benchmark, the current 13.9x implies a discount. This suggests the market is pricing First Merchants at a lower multiple than the model indicates for its earnings. That gap echoes the signal from the intrinsic value work and points to a stock that is not being valued at the full level suggested by these earnings-based checks.

On the P/E multiple, First Merchants stock currently appears undervalued relative to what this framework suggests investors might be willing to pay for its earnings.

The First Merchants Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for First Merchants pick up where the valuation work leaves off, by spelling out which combinations of future growth, margins and earnings would need to play out for the stock to be worth materially more or less than today's price. Rather than relying on a single multiple or model output, each Narrative lays out the assumptions behind its fair value view so you can track how they stack up against First Merchants' reported results over time, and they sit on Simply Wall St's Community page.

If you have a number driven view on whether Piper Sandler's higher price target and First Merchants' larger asset base after the First Savings acquisition truly support today's valuation, consider adding your own Narrative to the Simply Wall St community so others can weigh it alongside the latest results.

Do you think there's more to the story for First Merchants? Head over to our Community to see what others are saying!

The Bottom Line

For First Merchants, both the Excess Returns intrinsic value estimate and the earnings multiple work point to a stock that screens as undervalued rather than stretched. The broader checks look mixed rather than emphatic, so the current discount still needs to be weighed against integration and execution risks after the First Savings deal.

From here, the key question is whether First Merchants can translate its larger asset base into consistent returns on equity that line up with the intrinsic value case, and whether the market is willing to lift the P/E closer to the tailored fair multiple if that earnings story holds together.

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.