Bank stocks such as QCRH are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. For example, banks are required to hold more capital to reduce the risk to depositors. Focusing on elements such as book values, in addition to the return and cost of equity, can be beneficial for determining QCRH’s value. Below we will look at how to value QCRH in a fairly effective and uncomplicated method.
Why Excess Return Model?
Two main things that set financial stocks apart from the rest are regulation and asset composition. QCRH operates in United States which has stringent financial regulations. Furthermore, banks tend to not have substantial portions of tangible assets as part of total assets. So the Excess Returns model is suitable for determining the intrinsic value of QCRH rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
The main 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% – 11%) x $33.14 = $0.15
Excess Return Per Share is used to calculate the terminal value of QCRH, 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)
= $0.15 / (11% – 2.9%) = $1.91
These factors are combined to calculate the true value of QCRH’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $33.14 + $1.91 = $35.05
This results in an intrinsic value of $35.05. Relative to the present share price of US$37.76, QCRH is priced in-line with its intrinsic value. Therefore, there’s a bit of a downside if you were to buy QCRH today. Valuation is only one part of your investment analysis for whether to buy or sell QCRH. Fundamental factors are key to determining if QCRH 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 QCRH going forward? Our analyst growth expectation chart helps visualize QCRH’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether QCRH is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on QCRH 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.