Pinnacle Financial Partners Still Early In An Impressive Growth Story

 

Pinnacle Financial Partners' (PNFP) ("Pinnacle") differentiated, service-driven growth model continues to produce results, and the Street continues to take notice. These shares have risen another 25% or so since my last write-up, outperforming the average regional bank by a healthy margin (around 17% or so), and coming in more or less in the middle of my group of other high-growth banks including Bank OZK (OZK), East West (EWBC), First Republic (FRC), Signature Bank (SBNY), and SVB Financial (SIVB) (Signature and First Republic have done a little better, SVB a little worse, and Bank OZK and East-West are further behind).

I continue to be impressed by Pinnacle's ability to enter competitive banking markets organically, luring away proven revenue-producers from larger banks to build the commercial lending franchise. I've also liked the progress on remixing the deposit costs lower, though maintaining that as rates rise will be a challenge. M&A may be a risk to sentiment in the short-term, but I like the company's plan and while this is not the cheapest stock out there, for the growth I believe Pinnacle can achieve, the price is still pretty interesting.

 

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Pinnacle Financial Partners Still Early In An Impressive Growth Story

 

Pinnacle Financial Is Seeing Some Challenges, But Entering Atlanta Is A Major Opportunity

This has been a challenging quarter for many banks, and Pinnacle Financial Partners (PNFP). While the fourth quarter financial results were less than I was hoping for, there were still a lot of positives in the quarter and I remain bullish on the company’s long-term prospects. Management’s recent announcement that it is launching a de novo growth strategy in Atlanta is just one step on that long-term road, and one that I believe will ultimately go well for the company.

The shares have been lackluster performers since my last update (up slightly and down a bit versus broader bank indices), but I continue to see value below the mid-to-high $60’s.

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Pinnacle Financial Is Seeing Some Challenges, But Entering Atlanta Is A Major Opportunity

Pinnacle Standing Out In A Crowded Field

Markets like Tennessee, North Carolina, South Carolina, and Virginia are among the most competitive in the U.S., with established players like BB&T (BBT), Bank of America (BAC), First Horizon (FHN), and Wells Fargo (WFC) facing increasing competition from rivals like Fifth Third (FITB) and U. S. Bancorp (USB) attracted by the region’s above-average population growth and rising household income. Although that’s not great news for Tennessee’s Pinnacle Financial Partners (PNFP), this commercial-focused bank has a few tricks up its sleeve, including a differentiated corporate culture and customer service model, and some attractive specialty lending operations.

Pinnacle’s high deposit beta is a threat, as is its heavy commercial exposure and higher-cost deposit base, but I expect Pinnacle to outgrow its peer group in 2020 and over the next five and 10 years. If annualized core earnings growth in the high single digits is in fact a reasonable expectation, Pinnacle shares look undervalued below the mid-$60s.

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Pinnacle Standing Out In A Crowded Field

Playing M&A Bingo With BB&T

When an historically acquisitive bank signals that they’re reading to start considering M&A again, I don’t think it’s much of a stretch to start speculating on the sort of target(s) the company might have in mind. In the case of BB&T (BBT), while management has certainly laid out a case for worthwhile organic growth by focusing on its core strengths in business and consumer lending, the company has also laid out a clear set of criteria for future M&A, and I believe management would like to make a significant deal (or two) to vault the company over the $250 billion asset level.

Deal or not, I believe BB&T shares are modestly undervalued today. While there are certainly other options in BB&T’s size range worth considering (including PNC (PNC)), I believe mid-single-digit growth can support an attractive return at today’s price.

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Playing M&A Bingo With BB&T

Seeking Alpha: BB&T Has A Full To-Do List For 2016

Back in July, I thought BB&T (NYSE:BBT) looked a little rich from a valuation perspective, and the shares have sold off about 5% since then - modestly underperforming peers like U.S. Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC), PNC (NYSE:PNC), and Fifth Third (NASDAQ:FITB). Since that time, the company has increased its interest sensitivity a bit, announced another acquisition focused on Pennsylvania, and reiterated its commitment to grow by acquisitions while getting a little more conservative on overall loan growth.

Looking ahead, I don't think BB&T is done doing deals, but I don't believe the company is as likely to pull the trigger in 2016 unless a can't-miss opportunity comes along. Instead, I expect the company to prioritize the integration of its recent acquisitions and particularly the realization of expense synergies. At the same time, I would look for the company to try to offset pricing pressure in its insurance brokerage operations with greater volume and continue to develop its specialty lending operations.

I would describe BB&T's current valuation as "okay". The company paid up for its Pennsylvania acquisitions and its going to take time for those deals to show their value, putting even more pressure on those expense synergies. In the meantime, I like BB&T's strong credit quality and its disciplined approach to loan growth. Investors willing to take the elevated risk will find better banking bargains outside the U.S., but with a fair value in the low $40's, BB&T might be worth a look again today.

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BB&T Has A Full To-Do List For 2016