Rating Update: Stock Rating D-Negative (3/20/20)-Trustmark Corp (TRMK).

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BUSINESS

Trustmark Corporation operates as the bank holding company for Trustmark National Bank that provides banking and other financial solutions to individuals and corporate institutions in the United States. The company offers checking, savings, and money market accounts; individual retirement accounts; certificates of deposits; financing for commercial and industrial projects, income producing commercial real estate, owner-occupied real estate, and construction and land development; and installment and real estate loans, and lines of credit. It also provides mortgage banking services, including construction financing, production of conventional and government insured mortgages, and secondary marketing and mortgage servicing; overdraft facilities; and treasury management services.
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INVESTMENT RATING

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With future capital returns forecasted to be in line with the cost of capital, TRMK is expected to be Value Creation neutral.

Trustmark has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects highly consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Trustmark has a neutral Power Rating of 45 and a neutral Appreciation Score of 43, and the Negative Value Trend Rating results.

Trustmark’s stock is selling well below targeted value. The current stock price of $24.14 compares to targeted value 12 months forward of $38.
This neutral appreciation potential results in an appreciation score of 43 (57% of the universe has greater appreciation potential.)
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Trustmark has a Power Rating of 45. (This neutral Power Rating indicates that TRMK’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Contributing to this neutral Power Rating: recent price action has been neutral. Offsetting factors are earnings estimate behavior for TRMK has been slightly favorable recently; and is currently in a modestly favorable positi.

INVESTMENT PROFILE

Trustmark’s financial strength is high. Financial strength rating is 80.
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Relative to the S&P 500 Composite, Trustmark Corp has moderate Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that TRMK is lower risk. Relative weaknesses include: low forecasted profitability, low historical profitability, and low historical growth. Trustmark’s valuation is low: high dividend yield, moderate P/E ratio, and low price/book ratio. TRMK has unusually low market capitalization.

CURRENT SIGNALS

Trustmark’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

Trustmark’s current technical position is very weak. The stock price is in a 10.7 month down move. The stock has declined 25.2% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Recent meaningful negative changes in investment behavior have impacted Trustmark Corp (NASDAQ: TRMK): the stock fell on very heavy volume.
Trustmark Corp (NASDAQ: TRMK) has recently enjoyed small positive changes in fundamentals: significant quarterly earnings acceleration occurred.
The stock is currently rated D.
Trustmark Corp (NASDAQ: TRMK) stock suffered a major decline of -11.1% on 3/20/20. The shares closed at $141.88. Moreover, this decline was accompanied by exceptionally high trading volume at 211% of normal. The stock has performed in line with the market over the last nine months and has risen 11.7% during the last week.

CASH FLOW

In 2019, Trustmark generated an increase in cash of +$8.5 million (+2%). Sources of cash were very slightly larger than uses. Cash generated from 2019 EBITDA totalled +$305.2 million. Non-operating uses consumed -$92.0 million (-30% of EBITDA). Cash taxes consumed -$23.3 million (-8% of EBITDA). Re-investment in the business amounted to -$343.6 million (-113% of EBITDA). On a net basis, debt investors furnished +$243.4 million (+80% of EBITDA) while equity investors withdrew -$81.2 million (-27% of EBITDA).
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Trustmark’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Trustmark Corp Peer Group. In most years, Trustmark was in the third quartile and top quartile. Currently, Trustmark is at median at -30% of EBITDA (-$92.0 million).

Trustmark’s Cash Taxes, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Trustmark Corp Peer Group. In most years, Trustmark was in the top quartile. Currently, Trustmark is upper quartile at -8% of EBITDA (-$23.3 million).

Trustmark’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Trustmark Corp Peer Group. In most years, Trustmark was in the top quartile and lower quartile. Currently, Trustmark is below median at -113% of EBITDA (-$343.6 million).

Trustmark’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Trustmark Corp Peer Group. In most years, Trustmark was in the lower quartile and top quartile. Currently, Trustmark is at the upper quartile at +80% of EBITDA (+$243.4 million).

Trustmark’s Equity Investors, %EBITDA has experienced a minor downtrend over the period. This downtrend was accompanied by an opposite trend for the Trustmark Corp Peer Group. In most years, Trustmark was in the third quartile and lower quartile. Currently, Trustmark is lower quartile at -27% of EBITDA (-$81.2 million).

Trustmark’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Trustmark Corp Peer Group. In most years, Trustmark was in the third quartile and second quartile. Currently, Trustmark is at median at +3% of EBITDA (+$8.5 million).
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Trustmark’s Cash, %Revenue has exhibited a minor overall uptrend over the period. This improvement was accompanied by an opposite trend for the Trustmark Corp Peer Group. In most years, Trustmark was in the second quartile and third quartile. Currently, Trustmark is at the upper quartile at +51%.

PROFITABILITY

Trustmark’s return on equity reached a new post-2010 high in 2018.
This was due to strong negative trend in pretax operating return and small positive trend in non-operating factors.
The productivity of Trustmark’s assets declined over the full period 2010-2019: asset turnover has experienced a minor downtrend although it experienced a very sharp recovery after the 2016 low.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
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Trustmark’s return on equity is at the upper quartile (9.1%) for the four quarters ended December, 2019.
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Operating performance (pretax return on assets) is substantially below median (1.3%) reflecting asset turnover that is upper quartile (0.05X) and lower quartile pretax margin (24.9%).
Tax “keep” rate (income tax management) is upper quartile (86.6%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is above median (8.13X).

GROWTH RATES

There are no significant differences between Trustmark’s longer term growth and growth in recent years.
Trustmark’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 2.3% per year.

Total asset growth has been 3.8% per year.

Annual E.P.S. growth has been 3.0% per year. (More recently it has been 11.6%.)

Equity growth has been 3.6% per year.
No consensus growth rate forecast is available for Trustmark.
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Relative to the Trustmark Corp Peer Group, Trustmark’s historical growth measures are erratic. Revenue growth (2.3%) has been above median. Total asset growth (3.8%) has been slightly above median. E.P.S. growth (3.0%) has been lower quartile. Equity growth (3.6%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Trustmark’s stock price performance has been variable and significantly below market. Between May, 2009 and March, 2020, Trustmark’s stock price rose +24%; relative to the market, this was a -51% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -21.9% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2020 of -21.9% is substantially below median relative to Trustmark Corp Peer Group.

Current 5-year total return performance of 6.4% is below median relative to the S&P 500 Composite.
Through February, 2020, with below median current 5-year total return of 6.4% relative to S&P 500 Composite, Trustmark’s total return performance is at median relative to Trustmark Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, TRMK’s overall valuation is quite low. The highest factor, the ratio of enterprise value/revenue, is slightly below median. Ratio of enterprise value/earnings before interest and taxes is at the lower quartile. Price/earnings ratio is near the lower quartile. Price/equity ratio is lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.

Relative to Trustmark Corp Peer Group, TRMK’s overall valuation is normal. The highest factor, the price/equity ratio, is upper quartile. Price/earnings ratio is upper quartile. Ratio of enterprise value/earnings before interest and taxes is below median. Ratio of enterprise value/assets is at the lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
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Trustmark has a major value gap compared to the median. For TRMK to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.32X to 3.53X. If TRMK’s ratio of enterprise value/revenue were to rise to 3.53X, its stock price would be higher by $13 to $37.
For TRMK to achieve upper quartile valuation relative to the Trustmark Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.32X to 4.06X. If TRMK’s ratio of enterprise value/revenue were to rise to 4.06X, its stock price would increase by $19 from the current level of $24.

VALUE TARGETS

With future capital returns forecasted to be in line with the cost of capital, TRMK is expected to be Value Creation neutral.
Trustmark’s current Price Target of $38 represents a +57% change from the current price of $24.14.
This neutral appreciation potential results in an appreciation score of 43 (57% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 43, the neutral Power Rating of 45 contributes to an Value Trend Rating of D.
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Trustmark’s current Price Target is $38 (-2% from the 2019 Target of $39 but +57% from the 03/20/20 price of $24.14). This plateau in the Target is the result of a +11% increase in the equity base and a -11% decrease in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a slight positive impact.
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PTR’s return on equity forecast is 7.6% — in line with our recent forecasts. Forecasted return on equity erratic but little changed between 2011 and 2019. The current forecast is steady at the 2012 peak of 9%.

PTR’s growth forecast is 7.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2014 and 2019. The current forecast is well above the 2014 low of 1%.

PTR’s cost of equity forecast is 6.8% — in line with recent levels. Forecasted cost of equity exhibited a modest, variable increase between 2011 and 2019. The current forecast is steady at the 2011 low of 5.8%.
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At Trustmark’s current price of $24.14, investors are placing a negative value of $-10 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 4.0% per year, and a return on equity of 8.3% versus a cost of equity of 6.5%.
PTR’s 2021 Price Target of $38 is based on these forecasts and reflects an estimated value of existing assets of $34 and a value of future investments of $4.

About John Lafferty 69687 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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