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IBCP 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. The tiered capital structure is common for banks to abide by, in order to ensure they maintain a sufficient level of cash for their customers. Looking at data points such as book values, in addition to the return and cost of equity, can be useful for gauging IBCP’s true value. Below we will look at how to value IBCP in a fairly useful and uncomplicated approach.
What Model Should You Use?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. The regulatory environment in United States is fairly rigorous. In addition to this, banks usually do not have substantial amounts of tangible assets on their books. Therefore the Excess Returns model is appropriate for deriving the true value of IBCP as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.
Deriving IBCP’s True Value
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)
= (0.14% – 11%) x $16.17 = $0.38
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)
= $0.38 / (11% – 2.7%) = $4.38
Putting this all together, we get the value of IBCP’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $16.17 + $4.38 = $20.55
This results in an intrinsic value of $20.55. Relative to today’s price of US$22.29, IBCP is currently trading in-line with its true value. This means there’s no real upside in buying IBCP at its current price. Pricing is only one aspect when you’re looking at whether to buy or sell IBCP. There are other important factors to keep in mind when assessing whether IBCP 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 IBCP going forward? Our analyst growth expectation chart helps visualize IBCP’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether IBCP is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on IBCP 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.