On Thursday, Piper Sandler adjusted its price target for Alerus Financial Corp . (NASDAQ:ALRS) shares to $22.50, down from the previous $23.50, while maintaining a Neutral rating on the stock.
This change follows Alerus Financial's announcement of acquiring HMN Financial, Inc. (NASDAQ:HMNF) for approximately $116.4 million in an all-stock transaction. The deal's terms suggest a 33% one-day premium for HMN Financial shareholders, with a transaction value equating to 1.07 times tangible book value (TBV).
The acquisition is expected to result in a TBV dilution of around 10%, factoring in $21.7 million in pre-tax one-time deal-related costs, which represent 19% of the deal's value.
Despite the dilution, the guidance provided includes a TBV earn-back period of 2.2 years using the crossover method and an anticipated 45% or more increase in earnings per share (EPS) by 2025, including adjustments for rate marks and the Current Expected Credit Loss (CECL) double count.
Piper Sandler's analysis, however, estimates a longer TBV earn-back period of 3.1 years under the simple method. The firm notes that the market's reaction to the news was not surprising, with Alerus Financial's stock underperforming the group by approximately 500 basis points on the day of the announcement.
The underperformance is attributed to the significant TBV dilution and limited benefits that the acquisition of HMN Financial is expected to add to Alerus Financial's franchise, among other detailed factors.
The report by Piper Sandler reflects a cautious stance on the immediate financial impact of the acquisition on Alerus Financial. It emphasizes the potential challenges the company may face in integrating the acquisition and realizing the projected benefits, including the anticipated EPS accretion and TBV earn-back.
InvestingPro Insights
As Alerus Financial Corp. (NASDAQ:ALRS) navigates the recent acquisition of HMN Financial, Inc., current metrics from InvestingPro paint a detailed picture of the company's financial health. With a market capitalization of $390.2 million and a trailing twelve months P/E ratio of 39.16, ALRS is trading at a significant earnings multiple, which suggests high expectations from the market regarding future earnings growth. However, the company's revenue has seen a decline of 20.65% over the last twelve months as of Q1 2024, indicating potential challenges in revenue generation.
On the brighter side, ALRS boasts a dividend yield of 3.85%, which is a testament to its commitment to shareholder returns, having maintained dividend payments for an impressive 40 consecutive years. This commitment is further underscored by the company's dividend growth of 5.56% during the same period. Investors may also find solace in the fact that analysts predict ALRS will remain profitable this year, a sentiment reinforced by the company's successful track record over the last twelve months.
For those considering an investment in Alerus Financial, InvestingPro Tips suggest that while the company has raised its dividend consistently and is expected to grow its net income, it also faces challenges such as weak gross profit margins and downward revisions in earnings by analysts for the upcoming period. For a deeper dive into ALRS's financials and more InvestingPro Tips, interested investors can explore https://www.investing.com/pro/ALRS. Additionally, there are currently 7 additional InvestingPro Tips available for ALRS. To access these insights, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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