BOK Financial Corporation (NASDAQ:BOKF) Investors Are Paying Above The Intrinsic Value

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BOKF 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. For example, banks are required to hold more capital to reduce the risk to depositors. Looking at line items such as book values, with the return and cost of equity, is suitable for evaluating BOKF’s true value. Below we will look at how to value BOKF in a fairly accurate and simple approach.

View our latest analysis for BOK Financial

What Is The Excess Return Model?

There are two facets to consider: regulation and type of assets. BOKF operates in United States which has stringent financial regulations. In addition, banks tend to not hold large portions of physical assets on their books. Therefore the Excess Returns model is appropriate for deriving the true value of BOKF as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.

NASDAQGS:BOKF Intrinsic Value Export February 1st 19
NASDAQGS:BOKF Intrinsic Value Export February 1st 19

The Calculation

The central assumption for this model 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)

= (0.12% – 11%) x $69.76 = $0.28

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= $0.28 / (11% – 2.7%) = $3.24

Combining these components gives us BOKF’s intrinsic value per share:

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

= $69.76 + $3.24 = $73.01

This results in an intrinsic value of $73.01. Compared to the current share price of US$83.11, BOKF is currently trading in-line with its true value. Therefore, there’s a bit of a downside if you were to buy BOKF today. Valuation is only one side of the coin when you’re looking to invest, or sell, BOKF. There are other important factors to keep in mind when assessing whether BOKF 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 BOKF going forward? Our analyst growth expectation chart helps visualize BOKF’s growth potential over the upcoming years.
  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether BOKF is a dividend Rockstar with our historical and future dividend analysis.

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