Pinnacle Financial Partners Undervalued, But Arguably Out Of Step With A Nervous Market

Pinnacle Financial Partners (NASDAQ:PNFP) has been an underperformer since my last update on this fast-growing Southeastern bank. While sentiment on banks in general hasn’t been great, and several notable growth banks (First Republic (FRC), Signature (SBNY), and SVB Financial (SIVB)) have seen even worse performance, the nearly 15% decline in Pinnacle is disappointing in the context of ongoing execution of a well-founded model with a long runway for growth.

I can come up with at least a few reasons for some weakness in Pinnacle shares – the bank’s above-average deposit beta, aggressive opex spending growth, and dependence on loan growth among them – but even against a tougher backdrop for 2023/24, I think the shares still look attractive for growth-oriented investors willing to take on additional risk in pursuit of above-average returns.

 

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Pinnacle Financial Partners Undervalued, But Arguably Out Of Step With A Nervous Market

Pinnacle Financial Partners: A Banking Growth Story That's Not Dependent On Rates Or M&A

 

If you like organic growth stories predicated on out-executing the competition and you’re not as confident that the U.S. is about to see a significant rate tightening cycle, you may want to take a look at Pinnacle Financial Partners (PNFP). Actually, whatever your feelings about rates, this is probably a name you should know if you’re interested in organic growth stories in the bank sector.

Pinnacle continues to build on its tested land-and-expand strategy, targeting attractive growth markets by hiring away established bankers and then following up with strong customer service to gain loan and deposit share in attractive markets. These shares have done okay since my last update, and that performance comes at a time when “growth banks” haven’t been performing as well. With double-digit core earnings growth potential, I believe Pinnacle shares should trade closer to $110 than the current price around $90.

 

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Pinnacle Financial Partners: A Banking Growth Story That's Not Dependent On Rates Or M&A

Pinnacle Financial Partners Still Offers Exceptional Upside On Southeastern Share Growth

Banks with legitimately better models can do quite well, as seen at names like Bank OZK (OZK), First Republic (FRC), and SVB Financial (SIVB), and I made the case a year ago that Pinnacle Financial Partners (PNFP) belonged in that group, as this Southeastern-focused bank is using an intensely high-touch service model to gain loan and deposit share in attractive markets across the Southeast like Nashville, Charlotte, Raleigh-Durham, and Atlanta. While 2020 was a hard year for Pinnacle too, the bank has emerged with the growth story very much intact.

Pinnacle shares are up about 15% from when I last wrote on the stock, basically matching the S&P 500, but outperforming most of the bank’s peer group. While valuation looks high at first glance, and expectations are indeed elevated, I believe there’s a path here to double-digit long-term earnings growth that can support attractive returns from here, I think a mid-$80’s fair value is quite reasonable now.

 

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Pinnacle Financial Partners Still Offers Exceptional Upside On Southeastern Share Growth