Enterprise Financial Services has been treading water for the past six months, recording a small return of 4.4% while holding steady at $61.65.

Is there a buying opportunity in Enterprise Financial Services, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Enterprise Financial Services Not Exciting?

We're swiping left on Enterprise Financial Services for now. Here are three reasons we avoid EFSC and a stock we'd rather own.

1. Projected Net Interest Income Growth Is Slim

Forecasted net interest income by Wall Street analysts signals a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Enterprise Financial Services’s net interest income to rise by 4.2%, close to its 4.2% annualized growth for the past two years.

2. Net Interest Margin Dropping

Net interest margin (NIM) serves as a critical gauge of a bank's fundamental profitability by showing the spread between interest income and interest expenses. It's essential for understanding whether a firm can sustainably generate returns from its lending operations.

Over the past two years, Enterprise Financial Services’s net interest margin averaged 4.2%. However, its margin contracted by 25.7 basis points (100 basis points = 1 percentage point) over that period.

This decline was a headwind for its net interest income. While prevailing rates are a major determinant of net interest margin changes over time, the decline could mean Enterprise Financial Services either faced competition for loans and deposits or experienced a negative mix shift in its balance sheet composition.

3. Efficiency Ratio Expected to Falter

Topline growth carries importance, but the overall profitability behind this expansion determines true value creation. For banks, the efficiency ratio captures this relationship by measuring non-interest expenses, including salaries, facilities, technology, and marketing, against total revenue.

Markets understand that a bank’s expense base depends on its revenue mix and what mostly drives share price performance is the change in this ratio, rather than its absolute value. It’s somewhat counterintuitive, but a lower efficiency ratio is better.

For the next 12 months, Wall Street expects Enterprise Financial Services to become less profitable as it anticipates an efficiency ratio of 60% compared to 58.8% over the past year.

Final Judgment

Enterprise Financial Services isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 1.2× forward P/B (or $61.65 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of our top software and edge computing picks.

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