Investors Are Undervaluing Canadian Imperial Bank of Commerce (TSE:CM) By 22.65%

Pricing CM, a financial stock, can be difficult since these banks have cash flows that are affected by regulations that are not imposed upon other sectors. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Looking at line items like book values, on top of the return and cost of equity, may be appropriate for calculating CM’s intrinsic value. Today I’ll look at how to value CM in a reasonably effective and easy method.

Check out our latest analysis for Canadian Imperial Bank of Commerce

Why Excess Return Model?

Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. CM operates in Canada which has stringent financial regulations. Moreover, banks usually do not have substantial portions of physical assets as part of total assets. Excess Returns overcome some of these issues. Firstly, it doesn't focus on factors such as capex and depreciation - relevant for tangible asset firms - but rather emphasize forecasting stable earnings and book values.

The Calculation

The main assumption for Excess Returns is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns above the cost of equity is known as excess returns:

Excess Return Per Share is used to calculate the terminal value of CM, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:

Combining these components gives us CM's intrinsic value per share:

This results in an intrinsic value of CA$147.74. Relative to today's price of CA$114, CM is currently priced beneath its true value. This means you can buy CM at a discount to its value of CA$147.74. Pricing is only one aspect when you're looking at whether to buy or sell CM. There are other important factors to keep in mind when assessing whether CM is the right investment in your portfolio.

Next Steps:

For banks, there are three key aspects you should look at:

1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like bad loans and customer deposits.
2. Future earnings: What does the market think of CM going forward? Our analyst growth expectation chart helps visualize CM’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether CM is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on CM here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.