Merchants Bancorp (MBIN) is in focus after being added to multiple Russell growth benchmarks, while simultaneously being removed from the Russell 2000 Dynamic Index. This reshuffle could influence how index investors view the stock.

Despite the latest index reshuffle, Merchants Bancorp’s share price is at $46.66, with the stock down 6.23% over the past week but showing a 40.63% year to date share price return. The 5 year total shareholder return of 86.20% points to momentum built over a longer horizon.

If this index move has you thinking more broadly about opportunities, it could be a good moment to scan for other financials with long term potential using the 19 top founder-led companies

After a strong year-to-date run and fresh inclusion in several Russell growth benchmarks, Merchants Bancorp now sits at $46.66 and close to analyst targets. How much upside is still on the table versus already realised in the stock?

Price-to-Earnings of 11.4x: Is it justified?

On a P/E of 11.4x, Merchants Bancorp looks cheaper than both peers and the wider US diversified financials group, even after its strong recent share price performance.

The P/E ratio compares the current share price with earnings per share and is a common way investors judge how much they are paying for a company's profit stream. For a bank focused on multi-family mortgage banking, warehousing and traditional lending, this measure gives a straightforward read on what the market is willing to pay for its current profitability.

Here, the 11.4x P/E sits below the peer average of 13.6x and also below the US diversified financial industry average of 16.1x. It is also lower than the estimated fair P/E of 15x that the SWS fair ratio suggests the market could potentially gravitate toward if sentiment and fundamentals stayed aligned with that relationship.

Result: Price-to-Earnings of 11.4x (UNDERVALUED)

However, Merchants Bancorp still faces risks, including its reliance on multi-family mortgage and warehousing cycles, and the possibility that current valuation metrics already reflect recent growth.

Another View on Merchants Bancorp: DCF Points to Deeper Value

The P/E suggests Merchants Bancorp looks relatively inexpensive, but the SWS DCF model goes much further. With the stock at $46.66 and an estimated future cash flow value of $137.37, the DCF view indicates the shares are trading at a steep discount and screens as undervalued. Which signal should carry more weight for you?

For a closer look at how this cash flow based view is built, it can help to walk through the full SWS DCF model details using the Look into how the SWS DCF model arrives at its fair value.

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 44 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

Between the valuation signals and index moves around Merchants Bancorp, does the picture look more compelling or more concerning to you? Act while the data is fresh and review both sides of the story in the 3 key rewards and 3 important warning signs

Looking for more investment ideas beyond Merchants Bancorp?

If the latest signals around Merchants Bancorp caught your attention, do not stop here. Broaden your watchlist with focused stock ideas that match your style.

• Target resilient cash generators by scanning companies in the 44 high quality undervalued stocks that combine solid fundamentals with prices that may not fully reflect their underlying strength.
• Review the 9 dividend fortresses featuring companies with dividend yields above 5% that could support a regular payout profile.
• Prioritize capital preservation by checking the 72 resilient stocks with low risk scores highlighting stocks that score well on financial stability and lower risk characteristics.

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.