Julius Baer Group Ltd (VTX:BAER) Investors Are Paying Above The Intrinsic Value

Pricing BAER, a financial stock, can be difficult since these capital market businesses have cash flows that are affected by regulations that are not imposed upon other sectors. For example, capital market businesses are required to hold more capital to reduce the risk to shareholders. Focusing on line items like book values, with the return and cost of equity, may be suitable for estimating BAER’s valuation. Today we’ll take a look at how to value BAER in a fairly accurate and uncomplicated way. Check out our latest analysis for Julius Baer Group

What Model Should You Use?

Let’s keep in mind two things – regulation and type of assets. Strict regulatory environment in Switzerland’s finance industry reduces BAER’s financial flexibility. In addition to this, capital markets generally don’t hold substantial portions of physical assets on their books. So the Excess Returns model is suitable for determining the intrinsic value of BAER rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.

SWX:BAER Intrinsic Value May 23rd 18
SWX:BAER Intrinsic Value May 23rd 18

Calculating BAER’s Value

The key 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 = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (16.17% – 12.33%) * CHF31.34 = CHF1.2

Excess Return Per Share is used to calculate the terminal value of BAER, 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)

= CHF1.2 / (12.33% – 0.06%) = CHF9.78

Putting this all together, we get the value of BAER’s share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= CHF31.34 + CHF9.78 = CHF41.12

Relative to today’s price of CHF62.3, BAER is priced higher than its intrinsic value. Therefore, there’s no benefit to buying BAER today. Valuation is only one part of your investment analysis for whether to buy or sell BAER. Analyzing fundamental factors are equally important when it comes to determining if BAER has a place in your holdings.

Next Steps:

For capital markets, 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 leverage and risk.
  2. Future earnings: What does the market think of BAER going forward? Our analyst growth expectation chart helps visualize BAER’s growth potential over the upcoming years.
  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether BAER is a dividend Rockstar with our historical and future dividend analysis.

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