Ameriprise Financial Inc (NYSE:AMP) Is Trading At A 21% Discount To Its Price
Valuing AMP, a financial stock, can be daunting since these capital market firms generally have cash flows that are impacted by regulations that are not imposed upon other industries. Maintaining a certain level of cash capital ratio is common for these financial firms to abide by, in order to minimize risks to their shareholders. Emphasizing line items such as book values, in addition to the return and cost of equity, may be suitable for determining AMP’s value. Below I will show you how to value AMP in a reasonably accurate and easy way. Check out our latest analysis for Ameriprise Financial
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. Strict regulatory environment in United States’s finance industry reduces AMP’s financial flexibility. In addition to this, capital markets tend to not have substantial portions of tangible assets as part of total assets. This means the Excess Returns model is best suited for calculating the intrinsic value of AMP rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
The Calculation
The main belief for this model 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 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)
= (34.49% – 9.51%) * $47.67 = $11.91
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)
= $11.91 / (9.51% – 2.47%) = $169.28
These factors are combined to calculate the true value of AMP’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $47.67 + $169.28 = $216.95
Compared to the current share price of $172.01, AMP is , at this time, trading below what it’s actually worth. This means AMP can be bought today at a discount. Pricing is only one aspect when you’re looking at whether to buy or sell AMP. Analyzing fundamental factors are equally important when it comes to determining if AMP has a place in your holdings.
Next Steps:
For capital markets, there are three key aspects you should look at:
1. 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.
2. Future earnings: What does the market think of AMP going forward? Our analyst growth expectation chart helps visualize AMP’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether AMP is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on AMP here.
To help readers see pass 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.
