PARB operates in the banking industry, which has characteristics that make it unique compared to other sectors. Understanding these differences is crucial when it comes to putting a value on the bank stock. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Emphasizing factors such as book values, in addition to the return and cost of equity, can be practical for evaluating PARB’s true value. Today I will show you how to value PARB in a relatively useful and straightforward approach. Check out our latest analysis for Pareto Bank
What Is The Excess Return Model?
Two main things that set financial stocks apart from the rest are regulation and asset composition. Norway’s financial regulatory environment is relatively strict. Moreover, banks tend to not hold substantial portions of physical assets as part of total assets. This means the Excess Returns model is best suited for calculating the intrinsic value of PARB rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
Calculating PARB’s Value
The main assumption for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. 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)
= (15.66% – 8.40%) x NOK40.97 = NOK2.97
Excess Return Per Share is used to calculate the terminal value of PARB, 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)
= NOK2.97 / (8.40% – 1.99%) = NOK46.43
These factors are combined to calculate the true value of PARB’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= NOK40.97 + NOK46.43 = NOK87.4
This results in an intrinsic value of NOK87.4. Relative to today’s price of øre39.00, PARB is , at this time, undervalued. Therefore, there is potential room to profit from mispricing if you bought PARB at NOK87.4. Valuation is only one side of the coin when you’re looking to invest, or sell, PARB. There are other important factors to keep in mind when assessing whether PARB is the right investment in your portfolio.
For banks, 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 bad loans and customer deposits.
- Future earnings: What does the market think of PARB going forward? Our analyst growth expectation chart helps visualize PARB’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether PARB is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on PARB here.