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If You Bought Bank of the Ozarks (NASDAQ:OZRK) Today, There May Be An Upside

Ben Rossbaum

Pricing bank stocks such as OZRK 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 example, banks are required to hold more capital to reduce the risk to depositors. Emphasizing factors such as book values, on top of the return and cost of equity, can be suitable for calculating OZRK’s intrinsic value. Below I will show you how to value OZRK in a fairly useful and simple approach. View our latest analysis for Bank of the Ozarks

Why Excess Return Model?

Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. United States’s financial regulatory environment is relatively strict. In addition to this, banks tend to not have large amounts of physical assets on their books. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.

NasdaqGS:OZRK Intrinsic Value Apr 25th 18
NasdaqGS:OZRK Intrinsic Value Apr 25th 18

How Does It Work?

The main assumption 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 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)

= (13.74% – 9.90%) * $32.09 = $1.23

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

= $1.23 / (9.90% – 2.47%) = $16.58

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

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

= $32.09 + $16.58 = $48.67

Relative to today’s price of $47.58, OZRK is priced in-line with its intrinsic value. This means OZRK isn’t an attractive buy right now. Valuation is only one side of the coin when you’re looking to invest, or sell, OZRK. There are other important factors to keep in mind when assessing whether OZRK is the right investment in your portfolio.

Next Steps:

For banks, 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 bad loans and customer deposits.

  2. Future earnings: What does the market think of OZRK going forward? Our analyst growth expectation chart helps visualize OZRK’s growth potential over the upcoming years.

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

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