Valuing BPRN, 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 data points such as book values, on top of the return and cost of equity, is useful for gauging BPRN’s intrinsic value. Today we’ll take a look at how to value BPRN in a fairly useful and uncomplicated approach.
Why Excess Return Model?
Two main things that set financial stocks apart from the rest are regulation and asset composition. The regulatory environment in United States is fairly rigorous. Furthermore, banks usually do not possess substantial amounts of physical assets as part of total assets. So the Excess Returns model is suitable for determining the intrinsic value of BPRN rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
How Does It Work?
The key 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)
= (0.11% – 8.6%) x $29.54 = $0.70
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)
= $0.70 / (8.6% – 2.9%) = $12.37
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
= $29.54 + $12.37 = $41.91
This results in an intrinsic value of $41.91. Relative to the present share price of US$33.26, BPRN is currently priced below its intrinsic value. This means you can buy BPRN at a discount to its value of $41.91. Valuation is only one part of your investment analysis for whether to buy or sell BPRN. Fundamental factors are key to determining if BPRN fits with the rest of your portfolio holdings.
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.
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.