Pricing capital market stocks such as APO 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. For instance, these businesses must hold a certain level of cash reserves on the books as a safety precaution. Focusing on line items such as book values, on top of the return and cost of equity, may be useful for evaluating APO’s value. Today we’ll take a look at how to value APO in a relatively accurate and straightforward way. View our latest analysis for Apollo Global Management
What Model Should You Use?
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. Moreover, capital markets tend to not possess significant amounts of tangible assets as part of total assets. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
The main belief for Excess Returns 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 in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (65.09% – 8.96%) * $6.86 = $3.85
Excess Return Per Share is used to calculate the terminal value of APO, 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)
= $3.85 / (8.96% – 2.47%) = $59.27
These factors are combined to calculate the true value of APO’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $6.86 + $59.27 = $66.12
Relative to today’s price of $33.01, APO is priced beneath its true value. This means APO can be bought today at a discount. Pricing is only one aspect when you’re looking at whether to buy or sell APO. Analyzing fundamental factors are equally important when it comes to determining if APO has a place in your holdings.
For capital markets, 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 leverage and risk.
- Future earnings: What does the market think of APO going forward? Our analyst growth expectation chart helps visualize APO’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether APO is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on APO here.