First Bancshares Inc (FBMS) Is On Sale

First Bancshares Inc (NASDAQ:FBMS) is a bank holding company with $1.1 billion in assets and 30 branches in the Gulf South states of Mississippi, Louisiana, and Alabama. The regional bank has grown very quickly over the last five years, increasing its assets from $400 million in 2010 to over $1.1 billion in 2015 through M&A.

First Bancshares Inc acquired 8 Whitney Branches in 2011, adding $179 million in deposits, and acquired First National Bank of Baldwin County in 2013, adding another $187 million in assets.  First Bancshares Inc then acquired BCB Holding in 2014, adding $70 million in assets. Because assets have doubled in five years, EPS has increased. The bank has grown earnings per share by an average of 19.4% a year over the last 5 years.

Because EPS growth has been strong, the stock has more than doubled from $8 per share in 2010 to over $17 a share. First Bancshares Inc’s recent performance has been strong too, with shares up 21.65% in the last twelve months and up 18.44% year to date.

Given First Bancshares Inc’s small size, we believe the fast EPS growth will continue. Management estimates there are around 100 banks in First Bancshares Inc core area of Louisiana, Mississippi and Alabama that can be potential acquisitions. Organic growth will be strong, as the cities that First Bancshares Inc serves have healthy population growth, solid wage growth, and average unemployment rates. Given management’s track record of successful acquisitions, we believe management can maintain an EPS growth rate of 15-20% over the next 5 years.

Hedge funds have been divided on First Bancshares Inc (NASDAQ:FBMS). Matthew Lindenbaum’s Basswood Capital decreased its position by 4% to 371,040 shares while Anton Schutz’s Mendon Capital Advisors increased its position by 13% to 40,285 shares. We mention the hedge fund holders of First Bancshares Inc because following hedge fund activity can generate alpha. Our research shows that the 15 most popular small-cap stocks among hedge funds have outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012, and they managed to return more than 144% over the ensuing 2.5+ years and outperformed the S&P 500 Index by over 84 percentage points (read the details here).

If First Bancshares Inc continues its M&A strategy, shares of the bank are cheap relative to its growth rate. Assuming a PEG ratio of 1 and a growth rate of 15%, First Bancshares Inc should trade for $19.34 per share, or 13% above current prices. That would price First Bancshares Inc at 1.26 times its book value, or slightly below its peer average of 1.3-1.4x.