Valuing SPOL, a bank stock, can be daunting since these financial companies have cash flows that are impacted by regulations that are not imposed upon other industries. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Looking at factors such as book values, as well as the return and cost of equity, is useful for assessing SPOL’s true value. Below I will show you how to value SPOL in a relatively accurate and uncomplicated way.
What Model Should You Use?
There are two facets to consider: regulation and type of assets. Norway’s financial regulatory environment is relatively strict. In addition, banks generally don’t hold large amounts of tangible assets on their balance sheet. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
Deriving SPOL’s True Value
The central belief 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)
= (0.10% – 8.4%) x NOK90.34 = NOK1.68
Excess Return Per Share is used to calculate the terminal value of SPOL, 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)
= NOK1.68 / (8.4% – 2.0%) = NOK26.22
Combining these components gives us SPOL’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= NOK90.34 + NOK26.22 = NOK116.55
This results in an intrinsic value of NOK116.55. Given SPOL’s current share price of øre82.60, SPOL is , at this time, trading below what it’s actually worth. This means SPOL can be bought today at a discount. Valuation is only one side of the coin when you’re looking to invest, or sell, SPOL. There are other important factors to keep in mind when assessing whether SPOL 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 SPOL going forward? Our analyst growth expectation chart helps visualize SPOL’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether SPOL is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on SPOL 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 email@example.com.