Financial services analysts at Piper Sandler think Triumph Financial has a strong future over the next two years, but they aren't too hot on the stock right now.
In a report that could be read as more of an endorsement of the strategy of the trucking-focused bank, analysts Frank Schiraldi and Justin Crowley on Monday cut their rating on Triumph Financial (NASDAQ: TFIN) to Underweight from Neutral.
The reasons for their move are both somewhat complimentary to Triumph: The bank's strategy is sound and "should see significant bottom-line growth over the next 24 months," but at about 47 times Piper Sandler's estimated 2024 earnings for Triumph, the stock price has gotten excessive.
On Wednesday, Triumph Financial closed at $77.55 per share. Increases in the past 52 weeks and over the past three months are not particularly high, according to data provided by Barchart; the stock is up 10.9% in the past three months and 21.4% in the past year.
Piper Sandler's report was somewhat similar to that written by Wells Fargo at the end of 2022: Triumph Financial has a solid story to tell, its future is bright, but the payoff for it is long term, not immediate. (Triumph Financial does not pay a common stock dividend.)
"[TriumphPay] continues to roll along, investors have shaken off credit to date, and the stock has taken off," Piper Sandler wrote in its analysis. "But even assuming a freight recovery and great success in monetizing T-Pay, shares are already trading at 21x our exit EPS run rate in 2025. In the nearer term, investments in payments and the freight recession will keep the bottom-line somewhat under wraps, and so shares are now trading 47x our modeled 2024 EPS."
TriumphPay did become EBITDA-positive in the fourth quarter of 2023, the first time it has done so. While Triumph Financial's legacy business is as a factoring company, TriumphPay is seen as the engine of its future growth.
TriumphPay started as a rapid payment service before undertaking the giant leap the company is banking its future on: the system known simply as "the network," mostly serving brokers, which processes invoices and makes payments in an "open loop" system that became possible through its 2021 acquisition of HubTran. CEO Aaron Graft once defined a conforming transaction on the network as "where both the payor and the payee are integrated into the network such that structured data and remittance information may pass between parties digitally, which eliminates inefficiencies in the presentment, audit and payment of invoices."
Piper Sandler is a believer in Triumph Financial's future and was positive on some of the trends in its fourth-quarter earnings. It acknowledged the surprise positive EBITDA, which was ahead of Triumph Financial's estimates as well as that of Piper Sandler, which said it didn't think that milestone would be reached until the middle of this year.
Expenses at TriumphPay also came in for a compliment. Triumph management, according to the Piper Sandler report, had projected during the third quarter that fourth-quarter expenses would be on a level closer to second-quarter expenses, which had been "much higher" than in the third. But the analysts noted that fourth-quarter expenses were "modestly" higher compared to the third quarter and were 11% less than in the second quarter.
Key numbers are being reached
The report also noted the benchmarks achieved in user growth on the network: 17% sequentially for total volume but "fully conforming" volume up 45%. Fully conforming volume, which uses all the features of the network, is "more lucrative," according to Piper Sandler. A strong pipeline predicted by Triumph Financial management was also cited by Piper Sandler as a positive.
"A key will be converting network growth into fees, which based on commentary on the call now sounds set for more of a pick-up in 4Q24," the investment bank said. "We now look for TFIN to achieve its target $100M in revenue rate by 4Q25."
A new initiative in LoadPay
The Piper Sandler report discusses LoadPay, an initiative aimed at smaller truckers revealed during Triumph Financial's fourth-quarter letter to shareholders. That letter is a unique missive penned by Graft that goes into extensive detail about Triumph Financial's activities.
In Triumph Financial's earnings call with analysts the day after the release of the letter, Graft described LoadPay it as "a natural extension of the payments network."
"This wallet is targeted towards smaller truckers, which make up 95% of the entire trucking universe," Graft said on the call. "And we believe that the total addressable market for LoadPay will be very large. We further believe that our unique positioning for distribution will set LoadPay apart from any others who've come before, and we hope and expect we will see widespread adoption."
For now, Piper Sandler focused primarily on the costs of getting LoadPay up and running. "LoadPay, before it generates revenues, will add to the expense base in the near-term," the analysts said. But the increase was described by Piper Sandler as "modest," increasing expenses from $87 million in the fourth quarter to $90 million to $92 million in the first quarter.
The factoring business at Triumph recorded an average invoice size of $1,781 in the fourth quarter, a $9 increase from the prior quarter. If there is a recovery in freight markets later this year, Piper Sandler said, it expects the average invoice size could increase by about $200 per invoice.
The mixture of long-range optimism set against short-term weakness that is inherent in the Piper Sandler report sounded similar to what Graft said in the recent earnings call with analysts.
"We are not distracted by one or two or even three years of headwinds if we are seeing progress on the long-term vision," Graft said, according to a transcript. "There is no question in my mind we are seeing progress on the long-term vision. 2023 was not a great year for earnings, but it was a great year for Triumph Financial. We are far better as a company and far further on our journey than we were when we began the year. The plan is the same for 2024."