Pricing bank stocks such as SIVB is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. 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. Examining line items such as book values, in addition to the return and cost of equity, may be fitting for determining SIVB’s true value. Below I’ll take you through how to value SIVB in a reasonably effective and uncomplicated approach.
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What Model Should You Use?
There are two facets to consider: regulation and type of assets. SIVB operates in United States which has stringent financial regulations. In addition, banks generally don’t have large portions of tangible assets on their balance sheet. Therefore the Excess Returns model is appropriate for deriving the true value of SIVB as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.
Deriving SIVB’s Intrinsic Value
The key 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)
= (0.19% – 11%) x $122.82 = $9.95
Excess Return Per Share is used to calculate the terminal value of SIVB, 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)
= $9.95 / (11% – 2.7%) = $115.68
Combining these components gives us SIVB’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $122.82 + $115.68 = $238.5
This results in an intrinsic value of $238.5. Given SIVB’s current share price of US$231, SIVB is fairly priced by the market. This means SIVB isn’t an attractive buy right now. Valuation is only one side of the coin when you’re looking to invest, or sell, SIVB. Analyzing fundamental factors are equally important when it comes to determining if SIVB 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 SIVB going forward? Our analyst growth expectation chart helps visualize SIVB’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether SIVB is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on SIVB 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.