CIX operates in the capital markets sector, which has characteristics that make it unique to other industries. Understanding these differences is crucial when it comes to putting a value on the financial stock. For example, capital market businesses are required to hold more capital to reduce the risk to shareholders. Looking at line items like book values, as well as the return and cost of equity, is useful for assessing CIX’s true value. Below we’ll take a look at how to value CIX in a relatively effective and easy way. See our latest analysis for CI Financial
What Model Should You Use?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. CIX operates in Canada which has stringent financial regulations. In addition, capital markets usually do not have significant amounts of tangible assets on their balance sheet. 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.
How Does It Work?
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 in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (26.25% – 8.43%) * CA$7.56 = CA$1.35
Excess Return Per Share is used to calculate the terminal value of CIX, 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:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= CA$1.35 / (8.43% – 2.13%) = CA$21.42
Combining these components gives us CIX's intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= CA$7.56 + CA$21.42 = CA$28.98
Relative to today's price of CA$27.02, CIX is currently fairly priced by the market. Therefore, there's a bit of a downside if you were to buy CIX today. Valuation is only one side of the coin when you’re looking to invest, or sell, CIX. There are other important factors to keep in mind when assessing whether CIX is the right investment in your portfolio.
For capital markets, there are three key aspects you should look at:
- Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
- Future earnings: What does the market think of CIX going forward? Our analyst growth expectation chart helps visualize CIX’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether CIX is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on CIX here.