Is BNP Paribas SA (EPA:BNP) Expensive For A Reason? A Look At The Intrinsic Value
Pricing BNP, a financial stock, can be difficult since these banks have cash flows that are affected by regulations that are not imposed upon other sectors. 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, on top of the return and cost of equity, may be practical for estimating BNP’s valuation. Today I’ll take you through how to value BNP in a reasonably useful and straightforward approach. Check out our latest analysis for BNP Paribas
Why Excess Return Model?
There are two facets to consider: regulation and type of assets. Financial firms operating in France face strict financial regulation. In addition to this, banks tend to not possess significant portions of physical assets as part of total assets. This means the Excess Returns model is best suited for calculating the intrinsic value of BNP rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
Deriving BNP’s Intrinsic Value
The central 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)
= (8.57% – 11.35%) * €79.48 = €-2.21
Excess Return Per Share is used to calculate the terminal value of BNP, 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)
= €-2.21 / (11.35% – 0.92%) = €-21.17
These factors are combined to calculate the true value of BNP’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= €79.48 + €-21.17 = €58.32
Compared to the current share price of €63.5, BNP is , at this time, trading in-line with its true value. This means there’s no real upside in buying BNP at its current price. Valuation is only one side of the coin when you’re looking to invest, or sell, BNP. Analyzing fundamental factors are equally important when it comes to determining if BNP 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 BNP going forward? Our analyst growth expectation chart helps visualize BNP’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether BNP is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on BNP 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.
