FRME

We rate FIRST MERCHANTS CORP (FRME) as a Reduce with a composite score of 45.6/100 at a current price of $40.40. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in stability (57th percentile) and value (50th percentile), which together account for the majority of the composite score. Offsetting weakness in quality (31th percentile) and momentum (40th percentile) tempers our overall conviction. We assign a No Moat rating (28/100), Medium uncertainty, and Poor capital allocation.

Key items to watch: momentum to confirm whether the current price trend has legs; balance sheet deleveraging progress. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

FIRST MERCHANTS CORP holds a top-quartile position (#0 of 50) within the Finance, Insurance, And Real Estate sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 45.6/100 places it at rank #2703 in our full 7,333-stock universe. At $2.2B in market capitalization, FIRST MERCHANTS CORP is a mid-cap player in the Finance, Insurance, And Real Estate space, which limits certain scale advantages but may allow for more agile strategic execution.

Revenue contraction of -1% combined with momentum at the 40th percentile paints a cautious picture of the near-term business outlook. The market appears to be pricing in continued challenges, and a catalyst for reversal is not clearly visible from current data.

The margin cascade tells an important story: gross margins of 0% (-76.5pp vs sector) narrow to operating margins of 27% (+10.0pp vs sector) and net margins of 23.5%, yielding a gross-to-net conversion rate of N/A%. The significant margin erosion from gross to net suggests elevated operating expenses, high interest costs, or other structural drags that warrant monitoring.

At a current price of $40.40, FIRST MERCHANTS CORP is trading near fair value based on current fundamentals. Our value factor score of 50/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. Valuation metrics are mixed, with no strong signal of mispricing in either direction.

The stock currently trades at a P/E of 12.3x (roughly in line with the sector median of 11.9x), EV/EBITDA of 9.6x (at a premium), P/B of 1.1x, P/S of 2.9x. The above-sector P/E multiple suggests the market is pricing in superior growth or quality, which our analysis finds only partially justified by current fundamentals.

We assign a Medium uncertainty rating to FIRST MERCHANTS CORP. The stock presents a balanced risk profile: significant leverage (680% debt-to-equity) and weak quality scores (31th percentile). While not risk-free, the core business fundamentals are adequate to withstand moderate economic stress, and the range of potential outcomes around our fair value estimate is manageable.

Specific risk factors that inform our assessment include: significant leverage (680% debt-to-equity); weak quality scores (31th percentile). Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 57th percentile and quality factor at the 31th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: a 3.77% dividend yield anchors total return. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile is favorable for long-term investors.

We rate FIRST MERCHANTS CORP's capital allocation as Poor. Key concerns include elevated leverage (680% D/E), weak asset returns (ROA 1.2%). Exemplary capital allocators generate ROE above 20% and maintain conservative leverage — FIRST MERCHANTS CORP significantly underperforms these benchmarks, raising questions about management's ability to create shareholder value.

Investors should scrutinize management's reinvestment decisions and balance sheet trajectory before committing capital. Poor capital allocation often compounds over time: overlevered balance sheets limit strategic flexibility, while low returns on capital destroy shareholder value. We would need to see sustained improvement in profitability metrics and balance sheet discipline before considering an upgrade.

In summary, FIRST MERCHANTS CORP receives a Reduce rating with a composite score of 45.6/100 (rank #2703 of 7,333). Our quantitative framework assigns a No Moat (28/100, trend: stable), Medium uncertainty, and Poor capital allocation. The average factor score across quality, value, momentum, stability, and investment is 45/100.

Our analysis does not support a constructive view on FIRST MERCHANTS CORP at this time. The combination of limited competitive advantages, medium uncertainty, and poor capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.