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Artisan Partners Asset Management Inc (NYSE:APAM) Is Trading At A 8% Discount Right Now

APAM operates in the capital markets sector, which has characteristics that make it unique to other industries. Understanding these differences is crucial when it comes to putting a value on the financial stock. For example, capital market businesses are required to hold more capital to reduce the risk to shareholders. Looking at factors like book values, with the return and cost of equity, is fitting for computing APAM’s intrinsic value. Today we’ll take a look at how to value APAM in a relatively effective and simple way. Check out our latest analysis for Artisan Partners Asset Management

What Model Should You Use?

Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. The regulatory environment in United States is fairly rigorous. In addition to this, capital markets usually do not have significant portions of tangible assets on their books. While traditional DCF models emphasize on inputs such as capital expenditure and depreciation, which is less useful for a financial stock, the Excess Return model focuses on book values and stable earnings.

NYSE:APAM Intrinsic Value May 1st 18
NYSE:APAM Intrinsic Value May 1st 18

The Calculation

The main assumption for this model 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 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)

= (104.55% – 8.86%) * $2.18 = $2.08

Excess Return Per Share is used to calculate the terminal value of APAM, 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)

= $2.08 / (8.86% – 2.47%) = $32.6

These factors are combined to calculate the true value of APAM’s stock:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= $2.18 + $32.6 = $34.78

Relative to the present share price of $32.15, APAM is priced in-line with its intrinsic value. Therefore, there’s a bit of a downside if you were to buy APAM today. Pricing is one part of the analysis of your potential investment in APAM. Analyzing fundamental factors are equally important when it comes to determining if APAM 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 APAM going forward? Our analyst growth expectation chart helps visualize APAM’s growth potential over the upcoming years.

  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether APAM is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on APAM 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.

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