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Pricing BPRN, a financial stock, can be difficult since these banks have cash flows that are affected by regulations that are not imposed upon other sectors. For instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Examining factors like book values, as well as the return and cost of equity, can be beneficial for determining BPRN’s value. Today I will take you through how to value BPRN in a relatively useful and easy approach.
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What Model Should You Use?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. BPRN operates in United States which has stringent financial regulations. In addition, banks generally don’t hold significant portions of physical assets on their balance sheet. Therefore the Excess Returns model is appropriate for deriving the true value of BPRN as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.
How Does It Work?
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 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)
= (0.11% – 8.5%) x $30.47 = $0.63
Excess Return Per Share is used to calculate the terminal value of BPRN, 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)
= $0.63 / (8.5% – 2.7%) = $10.82
Putting this all together, we get the value of BPRN’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $30.47 + $10.82 = $41.29
This results in an intrinsic value of $41.29. Relative to today’s price of US$32.00, BPRN is currently priced below its intrinsic value. Therefore, there is potential room to profit from mispricing if you bought BPRN at $41.29. Valuation is only one part of your investment analysis for whether to buy or sell BPRN. Analyzing fundamental factors are equally important when it comes to determining if BPRN has a place in your holdings.
Next Steps:
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 BPRN going forward? Our analyst growth expectation chart helps visualize BPRN’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether BPRN is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on BPRN here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.