Triumph Bancorp (TFIN 0.51%), a $6 billion asset bank based in Dallas, Texas, has seen its stock plummet by roughly 40% this year. It's certainly not the only stock in today's market to suffer in the face of rising bond yields, the Federal Reserve's tightening monetary policies, high inflation, and Russia's invasion of Ukraine. But if you look under the hood of this small bank, you'll find a company that is revolutionizing how the trucking industry does business. Particularly in the wake of its recent declines, I see Triumph Bancorp as a growth stock with monster potential.
Revolutionizing the finances of trucking
Triumph Bancorp started serving the trucking industry by participating in the factoring business -- it purchased truckers' invoices in advance of payment to provide them with liquidity. Because they buy those invoices at a discount, factoring companies then make a nice profit once the shipping company or freight broker pays what they owe. However, while doing this, Triumph saw just how inefficient the payments process was between truckers, factoring companies, freight brokers, and shippers, and recognized that there was a much bigger opportunity. So it created a payments platform called TriumphPay that streamlines and automates the entire process.
In January, the first conforming payment was completed on the TriumphPay platform, in which a payment between a freight broker or shipper and a carrier or a factoring company was made in a mostly automated manner. TriumphPay began the year in a beta pilot stage involving two freight brokers and five factoring companies. Now, 39 freight brokers and 17 factors are participating in the beta, among them some of the largest players in the industry.
It's evident that Triumph is focusing its efforts on TriumphPay and the associated businesses. CEO Aaron Graft already stopped reviewing the company's community banking results a few quarters ago, and said on the first-quarter earnings call that the company is in discussions to sell 15 of its bank branches.
The massive opportunity ahead
When you look at Triumph's returns as a bank, they are already quite strong, and would likely be much stronger if Triumph wasn't investing so heavily in TriumphPay. But when you consider the size of the opportunity for this platform, it makes total sense that management is leaning in.
As the owner of the network, Triumph Bancorp earns subscription fees, network fees, and syndication fees; it will essentially be taking a small piece of every transaction. In 2022's first quarter, $5.7 billion worth of invoices were paid through the TriumphPay platform for an annual run rate of $22.8 billion. But TriumphPay as an independent unit is still losing money. It only generated about $8.1 million of revenue in Q1, although that was up from just $2 million in the prior-year period. However, Graft has said that he thinks TriumphPay will be processing $100 billion of annual payment volume by 2024, which is expected to give Triumph about $100 million in fee income.
Those would be big jumps from current levels. In 2021, Triumph generated roughly $54.5 million in fee income from the entire company's operations, and only about $8 million of that appears to have come from TriumphPay. Graft has also said that he thinks TriumphPay could eventually generate $500 million in earnings for the company annually. Triumph will likely be able to increase fees on the network as it becomes more mature and more deeply integrated into the trucking payments ecosystem. Triumph also earns interest income on factored receivables going through the network.
Buy for the long haul
There are several reasons why Triumph Bancorp may struggle a bit in the near term. First, it's investing heavily in TriumphPay, which has increased its expenses. Second, there are a lot of concerns that the U.S. may be at the start of a freight industry recession, in which freight volumes decline for two straight quarters or more. Third, Triumph trades at roughly 19 times forward earnings and more than 3 times its tangible book value -- that's a high valuation.
But as Graft has said, "somebody is going to deliver this to the market," as it simply makes no sense to spend money on an invoicing process full of friction. He also said he thinks TriumphPay will become even more of a no-brainer option for trucking companies to adopt as pressure on their margins rises.
The reality is Triumph Bancorp has its system up and running. The company has a roughly $2 billion market cap and plans to be processing $100 billion of payment volume annually across its network in two years. Like Visa and Mastercard, it's going to get a piece of the action on almost every transaction that goes through its network. I actually bought this stock at a higher level than it's currently trading for, but I have no problem whatsoever holding on patiently as it seizes the opportunity in front of it.