Over the past six months, First Merchants’s stock price fell to $35.72. Shareholders have lost 11.5% of their capital, which is disappointing considering the S&P 500 has climbed by 1.9%. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in First Merchants, 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 First Merchants Not Exciting?

Despite the more favorable entry price, we don't have much confidence in First Merchants. Here are three reasons why FRME doesn't excite us and a stock we'd rather own.

1. Revenue Tumbling Downwards

We at StockStory place the most emphasis on long-term growth, but within financials, a stretched historical view may miss recent interest rate changes, market returns, and industry trends. First Merchants’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 2% over the last two years.

2. Net Interest Margin Dropping

Net interest margin represents how much a bank earns in relation to its outstanding loans. It’s one of the most important metrics to track because it shows how a bank’s loans are performing and whether it has the ability to command higher premiums for its services.

Over the past two years, First Merchants’s net interest margin averaged 3.2%. Its margin also contracted by 26.7 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 First Merchants either faced competition for loans and deposits or experienced a negative mix shift in its balance sheet composition.

3. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

First Merchants’s EPS grew at an unimpressive 1.9% compounded annual growth rate over the last five years, lower than its 7% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

First Merchants isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 0.8× forward P/B (or $35.72 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the most dominant software business in the world.

Stocks We Would Buy Instead of First Merchants

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