Triumph Financial’s shares are down near a 52-week low, and now Wells Fargo has lowered the company’s rating.
But in doing so, the Wall Street bank appeared to affirm Triumph’s strategy that focuses on its open-loop payments system serving the trucking market with less attention given to its traditional factoring business.
Wells Fargo’s rating was cut to Underweight from Hold. Wells Fargo says in its documentation that Underweight is tantamount to a sell rating.
Triumph Financial (NASDAQ: TFIN) rebranded from Triumph Bancorp on Dec. 1.
The primary argument made by Wells Fargo analysts in making their change in rating is not that the company’s gradual shift from a factoring bank to a greater focus on the processing capabilities in TriumphPay isn’t going to work. It’s that the strategy is going to take awhile to play out and investors might not want to stick around that long.
The company’s annual report to investors spelled out its future-driven mantra in its title: “A Clear Path Forward.”
A similar theme was sounded in a statement provided by Triumph Financial to FreightWaves on the Wells Fargo report: “We don’t comment on our stock price or analyst recommendations. What we can say is that our commitment to trucking is permanent – not cycle dependent. Cycles alternatively create tailwinds and headwinds. Tailwinds are financially beneficial, but headwinds create opportunities.”
Triumph investors have had a tough 2023. Triumph’s stock price hit a 52-week low Tuesday, and it is down about 57% in the last year and more than 62% since an early January 52-week high. The company does not pay a dividend.
“We believe management’s current optimistic view of the trucking payment space is already priced into the stock, while breakeven for TriumphPay remains more than two years out,” Wells Fargo wrote in its report. “We are trying not to discount the opportunity TFIN has to disrupt the $420 billion for-hire trucking market, but we believe the risk to shares remains to the downside as the economy heads toward a recession.”
Triumph Financial’s most recent price-to-earnings ratio for the trailing 12 months is about 13.4, according to Barchart, a level that would not be considered excessive.
Identifying a peer for Triumph Financial is tough; it is very much a trucking-focused bank and most of its loan book is made up of factoring payments made into that specific sector. There are no publicly traded entities that match such a description.
But the current P/E ratio for Triumph Financial is well above that of Citi (NYSE: C), at about 5.6 according to Barchart, and JPMorgan Chase (NYSE: JPM), which is about 11.
TriumphPay’s “long-term disruptive nature … remains impressive,” Wells Fargo wrote. Its “ultimate profitability” could exceed that in traditional banking, the report added. “But buyers of shares are currently in the stock for a very long-term vision that could take longer to pay off than expected.”
The heart of that vision can be heard every three months on the company’s quarterly earnings call, during which CEO Aaron Graft and other executives, but mostly Graft, spend far more time speaking about TriumphPay than the traditional factoring and other financial services.
In the most recent earnings call, Graft’s prepared remarks went immediately to TriumphPay.
“From a long-term perspective, we have made material progress on our payments network, and we’ve done that despite freight headwinds, specifically, our invoice volume increased 6.6%,” Graft said, according to a transcript of the call. “And even more importantly, our network transaction volume increased 21.7%. Regardless of headwinds in freight or market volatility and whether it lasts quarters or years, we’re committed to our revenue goals and to being EBITDA positive in TriumphPay in 2024. And if you couple that with the profitability of our banking and factoring segments, we have a lot to be excited about.”
The Wells Fargo report said other goals at TriumphPay include processing $75 billion in volume and having $100 million in a revenue run rate.
At the heart of the TriumphPay model is the acquisition last year of HubTran, which internally now is called TriumphAudit and is part of TriumphPay, the Triumph segment that even before the acquisition processed and rapidly paid invoices submitted to it.
On the company’s first-quarter earnings call this year, Graft announced that the company had completed its first “conforming” transaction in which the existing TriumphPay quick pay processes were combined with those of HubTran. After that call, Graft told FreightWaves, “HubTran brought with it the institutional knowledge and technical talent to understand how you audit an invoice and how to make sure the payer and the payee agree on what the invoice says.”
Triumph executives have also stressed on numerous occasions that they will keep a strict wall between TriumphPay and the existing factoring business of Triumph Business Capital so that the latter would not be able to learn details of factoring deals completed by other financing companies and then sent to TriumphPay for processing.
Along with the timeline for a payoff from TriumphPay, Wells Fargo also lowered its rating on Triumph Financial, in part due to its bearish forecast on trucking markets. “We believe the transportation market is likely to further soften, especially if the Fed gets its wish for slowing consumer consumption,” the report said.
The report doesn’t say what Wells Fargo’s expectations were for TriumphPay profitability. But it said that it had reduced its earnings per share estimates for Triumph Financial to $2.37 in 2023 and $3.40 in 2024 from earlier estimates of $2.66 and $3.68, respectively. It added it had done so because Wells Fargo “[has] priced in some risk to a longer-than-expected payoff for Triumph Pay into our model.”
Through the first nine months of 2022, Triumph reported diluted EPS of $3.28. The Wells Fargo price target for Triumph Financial was cut to $50 from $60, which is still higher than the current level.
TriumphPay’s services are marketed primarily to brokers. On the most recent earnings call, TriumphPay President Melissa Forman said TriumphPay had not planned to bring any brokers at a level she called “Tier 1” into the system in the fourth quarter.
“Those are more lumpy and you’re going to see those happen in the first half, second half of next year,” she said on the call. “It’s not a matter of will we have to onboard all at once. There will be continuous onboarding throughout the year. It’s just that those larger ones tend to add $3 billion, $4 billion, $5 billion all at once when they come onto the network.”
However, TriumphPay did announce in late November that it had signed up the brokerage arm of Schneider National (NASDAQ: SNDR) as the 76th broker on the network. It also said at that time that it has 20 factoring companies on TriumphPay.
But Wells Fargo cautioned that growth will take time. “With the ultimate decision on whether to adopt the TPay product up to individual customers, followed by the required ramp-up in volumes from these customers, the lag until full monetization of these volumes before the Payments segment begins to see profitability increases the potential for near-term volatility in EPS,” the report said. “Management has been wary of increasing fees on the TPay network since they integrated HubTran, and we have yet to see how volumes react to an expected shift in focus toward monetization over the next few years.”
The “upside scenario” for Triumph Financial, according to Wells Fargo, is that profitability for TriumphPay “comes sooner than expected and [causes] EPS growth to inflect upward. If TPay
becomes profitable on or ahead of schedule, investors would likely assign a higher value to the payments side of the bank. We could see shares trade up to $65 in this scenario.”
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