On Friday, Piper Sandler adjusted its stance on Live Oak Bancshares (NYSE: NYSE:LOB) shares, reducing the bank's price target from $50.00 to $44.00 while maintaining a Neutral rating on the stock. The adjustment followed a significant drop in the company's shares, which fell over 8% amid trading after a conference call with investors and analysts.
The decrease in the price target is attributed to an unexpected rise in the bank's provision for credit losses, which resulted in earnings falling short of expectations. According to the firm, this was due to three specific borrower relationships that were identified as problematic. However, management described this increase as a "blip" and expressed confidence in the overall health of the portfolio.
Despite the concerns raised by the higher provision, Live Oak Bancshares reported a record-breaking quarter in terms of loan originations. Moreover, the bank's pre-provision net revenue (PPNR) exceeded the firm's estimates. These positive developments suggest a strong operational performance, even as credit issues loom.
As a consequence of these mixed results, Piper Sandler has revised its earnings per share (EPS) forecasts for Live Oak Bancshares for the years 2024 and 2025. The new estimates are set at $1.72 and $2.60, down from the previous $2.03 and $2.78, respectively. The firm's price target is now based on approximately 17 times the estimated 2025 earnings, a decrease from the earlier multiple of 18 times.
The firm's report suggests that while Live Oak Bancshares has shown robust origination growth, the recent credit events have led to a more cautious outlook on the stock's valuation in the near term.
In other recent news, Live Oak Bancshares demonstrated significant growth in its Q3 2024 earnings report. The bank reported an 18% quarter-over-quarter increase in adjusted pre-provision net revenue (PPNR), driven by a 10% rise in revenues and controlled expense growth.
Moreover, the company achieved record loan production of $1.8 billion, marking a 50% increase from previous highs, primarily due to small business banking and commercial lending.
Deposits also saw a 7% quarter-over-quarter growth, fueled by the introduction of a new operating account and a focus on strengthening business relationships. Live Oak Bancshares anticipates continued growth and potential benefits from a softer economic landing and lower interest rates in the future.
The company also noted a negative one-year repricing gap of about 19% which could lead to near-term margin compression, and a slight rise in unguaranteed classified loans due to specific borrower challenges. However, over 50% of the loan portfolio is variable and re-priced quarterly, which could potentially benefit from interest rate changes.
Finally, Live Oak Bancshares projects robust loan origination levels in the future, with a normalized range of $1.2 billion or more, and expects significant growth in the small dollar SBA program, reaching $100 million in production.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Piper Sandler's analysis of Live Oak Bancshares (NYSE: LOB). Despite the recent setback, LOB's financial metrics reveal a mixed picture that aligns with the firm's cautious stance.
InvestingPro data shows that LOB's P/E ratio stands at 18.86, which is relatively low compared to its PEG ratio of 0.25. This suggests that the stock might be undervalued relative to its earnings growth potential, supporting Piper Sandler's maintained Neutral rating despite the price target reduction.
The company's revenue growth of 9.13% over the last twelve months demonstrates continued expansion, albeit at a slower pace than previously anticipated. This growth, coupled with a strong operating income margin of 25.65%, indicates that LOB maintains operational efficiency despite the credit concerns highlighted in the earnings call.
InvestingPro Tips point out that LOB has maintained dividend payments for 10 consecutive years, which may provide some reassurance to investors during this period of volatility. Additionally, the stock has shown a high return over the last year, with a 1-year price total return of 55.49%, suggesting resilience in the face of challenges.
It's worth noting that InvestingPro offers 8 additional tips for LOB, providing a more comprehensive analysis for investors seeking deeper insights into the company's prospects.
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