Is It Time To Reassess First Merchants (FRME) After Recent Share Price Stability?

• If you are looking at First Merchants and wondering whether the current share price still represents good value, you are not alone.
• The stock last closed at US$42.05, with returns of 0.5% over the past 7 days, 11.7% over 30 days, 12.1% year to date and a 1% decline over the past year, which may signal changing expectations around its prospects and risk.
• This article was prompted by Simply Wall St's evergreen coverage of First Merchants, which periodically refreshes to keep valuation and fundamentals in focus for long term investors. That context makes it a good moment to step back from short term moves and reassess what the current price might be offering you.
• On Simply Wall St's valuation checklist, First Merchants scores 5 out of 6. This suggests that several standard valuation tests point to potential undervaluation. We will walk through those methods next before finishing with a more complete way of thinking about what the stock might be worth to you.

Find out why First Merchants's -1.5% return over the last year is lagging behind its peers.

Approach 1: First Merchants Excess Returns Analysis

The Excess Returns model asks a simple question: is First Merchants expected to earn more on its equity than the return investors require, and for how long can that continue? It starts with the bank’s current balance sheet strength and then layers on analyst expectations for future profitability.

For First Merchants, the model uses a Book Value of $42.87 per share and a Stable Book Value estimate of $46.71 per share, based on weighted future book value estimates from 5 analysts. On the earnings side, Stable EPS is set at $4.53 per share, sourced from weighted future Return on Equity estimates from 4 analysts. That implies an Average Return on Equity of 9.70%.

The required return for shareholders is captured as a Cost of Equity of $3.29 per share. The gap between what the bank is expected to earn and what investors require is the Excess Return, estimated at $1.24 per share. When these excess returns are projected forward and discounted, the model arrives at an intrinsic value of about $80.68 per share.

Against the recent share price of $42.05, this suggests the stock is 47.9% undervalued on this measure.

Result: UNDERVALUED

Our Excess Returns analysis suggests First Merchants is undervalued by 47.9%. Track this in your watchlist or portfolio, or discover 51 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for First Merchants.

Approach 2: First Merchants Price vs Earnings

For a profitable bank like First Merchants, the P/E ratio is a straightforward way to see what the market is currently paying for each dollar of earnings. It ties the share price directly to the company’s profit, which is usually the key driver for established lenders.

What counts as a “fair” P/E depends on how investors view growth potential and risk. Higher expected earnings growth or lower perceived risk can support a higher multiple, while slower growth or higher risk often pulls it down. First Merchants currently trades on a P/E of 10.69x. That sits below the Banks industry average of 11.83x and also below the peer average of 14.73x.

Simply Wall St’s Fair Ratio for First Merchants is 12.76x, which reflects its own mix of earnings growth profile, industry, profit margins, market cap and risk factors. This tailored yardstick can be more useful than a simple comparison to peers or the industry because it aims to match the multiple to the company’s specific characteristics. With the current P/E of 10.69x sitting below the Fair Ratio of 12.76x, the shares appear undervalued on this metric.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your First Merchants Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which let you write the story behind your numbers by linking your view of First Merchants future revenue, earnings and margins to a financial forecast. This is then turned into a Fair Value you can compare with today’s price, all within a simple tool on Simply Wall St’s Community page that updates when new information like earnings or news arrives. One investor might build a more optimistic First Merchants Narrative that lines up with the analysts’ Fair Value of about US$46.83 per share, while another might plug in more cautious assumptions and arrive at a lower Fair Value. This can help each of them decide for themselves whether the current price looks high, low or about right.

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

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.

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