GWB 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. For example, banks are required to hold more capital to reduce the risk to depositors. Focusing on line items such as book values, along with the return and cost of equity, may be beneficial for gauging GWB’s intrinsic value. Today we’ll take a look at how to value GWB in a relatively accurate and easy method.
What Is The Excess Return Model?
Two main things that set financial stocks apart from the rest are regulation and asset composition. Financial firms operating in United States face strict financial regulation. In addition, banks usually do not possess significant amounts of physical assets on their balance sheet. So the Excess Returns model is suitable for determining the intrinsic value of GWB rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
The key assumption 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 $34.12 = $0.027
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)
= $0.027 / (11% – 2.9%) = $0.34
These factors are combined to calculate the true value of GWB’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $34.12 + $0.34 = $34.45
This results in an intrinsic value of $34.45. Relative to the present share price of US$39.55, GWB is currently priced in-line with its intrinsic value. This means there’s no real upside in buying GWB at its current price. Pricing is only one aspect when you’re looking at whether to buy or sell GWB. There are other important factors to keep in mind when assessing whether GWB 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 GWB going forward? Our analyst growth expectation chart helps visualize GWB’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether GWB is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on GWB 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 firstname.lastname@example.org.