If there’s one thing I’ve learned throughout my more than 20 years in the markets, it’s that with some companies, there’s more to them than meets the eye.

This was especially the case with Home BancShares Inc. (NASDAQ: HOMB), a regional bank based out of Conway, Arkansas.

On a Friday afternoon back in summer 2016, I was wrapping up my work and heading out for my “ready for the weekend pizza and vino” run when I got an email from Home BancShares chairman John Allison.

Now, I had just published an article about banks that I thought were overvalued at the time based on the price-to-book-value ratio. Mr. Allison’s company made the list, and he thought I was a little unfair in that regard.

Don’t be mistaken: he didn’t chew me out or anything. He’s a stand-up guy who wanted to have a thoughtful conversation and provide me with his side of the story.

And let me tell you that if I had a bank, I would definitely want Allison as my CEO…

Here’s How One Fateful Phone Call Changed My Mind

When I wrote that story, Home BancShares had a market capitalization of around $600 million and $9 billion in total assets. It was highly unlikely that my article would cause a run on his stock price, but he cared enough about the company to reach out anyway.

At the time, he was vacationing in the Florida Keys, so I was flattered that he took the time out of his weekend to share with me his vision for the bank.

Mr. Allison explained his bank’s growth strategy: buy well-located, underperforming banks and improve their internal rates of return to the much higher returns his bank was already earning. He insisted that all deals have a positive return from day one and that his bank never dilutes current shareholders’ earnings or book value per-share.

After we talked for some time, I came away from the Saturday afternoon conversation with three enlightening conclusions…

First, John Allison was using the exact same approach to buying banks that I used, but he was buying the whole bank and not just a few hundred shares. I may have a decent pile of cash to put to work, but I’m just one guy. So while we both have different amounts of capital, we still have the same philosophy when it comes to buying banks at a nice discount.

Second, he and his team had the sharpest pencils in banking and were very good at doing deals that built value for shareholders. These have included his most recent acquisition of Stonegate Bank, expanding Home BancShares into Florida with 89 new branches and even New York City with one branch.

And my third conclusion was that someone who took the time to explain the secrets of his profit-making machine is definitely the kind of CEO I would want running any company I owned.

It’s no wonder HOMB is one of my favorite bank stocks…

How John Allison Could Double Your Money – or More

You see, John Allison treats his shareholders the way a CEO should, with an eye on increasing the value of the company.

That’s a huge surprise when you consider that he and his family are among the bank’s largest shareholders. The management and board of the bank all have skin in the game and collectively own almost 10% of HOMB stock.

Since that conversation, Mr. Allison and his team have increased the total assets of the bank to over $14 billion with sharp deal making. And when the bank’s executives spoke at the Gulf South Bank Conference in New Orleans earlier this month, they expressed interest in future M&A deals, even saying they were currently evaluating two opportunities to build value for shareholders.

The management team has mastered the art of the deal from John Allison, and they have executed their deals brilliantly. It shows in the bank’s revenue growing 14% a year over the past decade.

But because they excel at buying poorly performing banks and reducing costs, that revenue boost has led to an annual increase in earnings of more than 24% a year and annual free cash flow growth of more than 30%.

Now, this isn’t some cautionary tale of uncontrolled growth by any means necessary. You can tell that from the efficiency ratio, which determines how weakly a bank is managing its resources and expenses.

A lower ratio is better, and Home Bancshares has one of the lowest in the industry. In fact, their current efficiency ratio is almost 40% lower than the average bank. And since management builds revenue and controls cost, they can consistently earn returns that are far higher than most of their competitors.

It is not too often that you buy a best in class company at a bargain multiple, but that’s exactly the opportunity I’m seeing with HOMB at current price levels.

John Allison told me on that June afternoon in 2016 his near-term goal was to get earnings up to $2 a share. He also projected that Wall Street would reward that earnings growth with a 25 multiple so HOMB would achieve, voila, a $50 stock price.

Right now, I’m confident he could reach that $2 mark in 2019 (unless he finds a deal that gets him there quicker) and that type of solid growth will likely be rewarded at some point with his desired multiple.

With my math, those conditions coming true would give us gains of over 100% in a fairly short amount of time.

My chance talk with John Allison revealed it’s much smarter to bet with him than against him. Owning Home Bancshares at this price gives you a chance to bet with him at very favorable odds.

— Tim Melvin

Source: Money Morning