Since going public in 2014, shares of the roughly $6 billion asset Triumph Bancorp (TFIN 1.10%) are up 935% and trade at an astounding 6.7 times tangible book value, which is what a bank would be worth if it were immediately liquidated. Most strong bank stocks trade at two or maybe three times tangible book. But Triumph is not your average bank. It is disrupting the trucking industry with its innovative payments platform TriumphPay that has revolutionized the way freight brokers, shippers, factors, and carriers all connect and complete transactions. Although the stock has run up quite a bit, this may just be the beginning for Triumph. Here's why.
Finding a payments niche
The trucking industry involves four key players. There is the shipper, which is the company that has goods it wants to send to another business that purchased them. Then there are the carriers, or trucking companies, that have the capabilities to make this transportation happen. The third player is the freight brokers that essentially serve as the middlemen to connect the two, and the fourth player is the factoring company.
Factoring companies play an essential role. In the trucking industry, after delivery, it is not uncommon for carriers to not receive payment on invoices for another month, despite incurring a good amount of expenses upfront to do the transportation. The factoring company will purchase the carrier's invoices immediately after delivery but at a discount, providing the carrier quick access to cash flow. Then the factoring company collects the payment for the invoice later down the line and makes a nice profit on the discount it purchased the invoice for.
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As you might imagine, there is a good deal of paperwork, phone calls, invoices, and manual work involved among the four key players. Triumph has created a payments platform -- and is really in the process of creating a full-scale payments rail -- to automate and streamline the entire process and create "frictionless" transactions for handling invoices and payments. Carriers can also use TriumphPay to access factoring whether it's through Triumph's balance sheet or other factoring companies on the network. Earlier this year, Triumph acquired a company called Hubtran, an auditing tool that works with 225 freight brokers and 55 factors to validate invoices and make sure all of the necessary paperwork is present. Triumph is currently working on integrating both platforms by early next year.
TriumphPay has gained some real traction and now has 532 freight brokers and 66 factoring companies on the platform, while more than 156,000 carriers have been paid through TriumphPay over the last year. Of the top 20 factoring companies, HubTran has 11 on its platform. Of the top 25 brokers, HubTran and TriumphPay have 15, with the company prospecting many of the factoring companies and brokers it doesn't have. Third-quarter payments volume of $4.2 billion on TriumphPay suggests annual volume of $16.8 billion.
Ready to go on offense
Innovative payments platforms like TriumphPay don't come together overnight. They take lots of time and investment to build, and then a good amount of sales efforts to convince businesses to get on the platform and build the network. Triumph has now done a lot of this legwork and believes the effort will soon turn into significant revenue.
Through the first nine months of 2021, the bank had generated about $40 million of non-interest income, of which nearly $12 million appears to have come from TriumphPay. But as Triumph transitions from proof-of-concept to going more on offense, TriumphPay is going to see a lot more revenue from subscription fees charged to participants to use the network, network fees on certain transactions, and eventually syndication fees for connecting carrier invoices to the factoring companies that want them as receivables. On the bank's most recent earnings call, Triumph CEO Aaron Graft said that in three years, he expects TriumphPay to be processing $75 billion of payments volume annually, resulting in $100 million of fee income. In Q3, TriumphPay lost money for the bank on an operating basis, but soon it will be the key driver of revenue at the bank by a long shot.
Furthermore, Graft thinks $100 million in fee income is just the starting point on a much bigger opportunity. He thinks TriumphPay can ultimately balloon to a $500 million business once it gets fully integrated into the industry. The $100 million also does not include the opportunity for Triumph in the $250 billion contract shipping space, a market Triumph has just only begun to tap into. Meanwhile, while Triumph has been heavily investing in its payments platform but not seeing the revenue, it still has managed to generate a 1.9% return on average assets and a return on average tangible common equity of more than 22%. Those returns alone would be good enough to earn Triumph a very strong valuation in the banking sector.
Not going to trade like a bank
On the Q3 earnings call, Graft said that management would no longer address its community banking results in its opening remarks. That's because Triumph is no longer just a community bank and therefore no longer going to trade like one. It is trading like the fast-growing and innovative fintech that it has transformed into. Currently, Triumph trades at more than 30 times earnings and nearly seven times revenue. Surely, this is a strong valuation and some of this future revenue has likely been priced in, but I also wouldn't call this unreasonable right now, especially if Graft and Triumph can hit on some of the promises and projections that they have been telling investors.
