Valuing FLIC, a bank stock, can be daunting since these financial companies have cash flows that are impacted by regulations that are not imposed upon other industries. 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, along with the return and cost of equity, is practical for calculating FLIC’s value. Below I’ll take you through how to value FLIC in a reasonably useful and easy method. See our latest analysis for First of Long Island
Why Excess Return Model?
Let’s keep in mind two things – regulation and type of assets. United States’s financial regulatory environment is relatively strict. In addition, banks usually do not have large amounts of tangible assets as part of total assets. So the Excess Returns model is suitable for determining the intrinsic value of FLIC rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
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)
= (10.64% – 9.83%) * $16.22 = $0.13
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)
= $0.13 / (9.83% – 2.47%) = $1.78
These factors are combined to calculate the true value of FLIC’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $16.22 + $1.78 = $18
Relative to the present share price of $27.45, FLIC is priced higher than its intrinsic value. This means there’s no upside in buying FLIC at its current price. Pricing is only one aspect when you’re looking at whether to buy or sell FLIC. There are other important factors to keep in mind when assessing whether FLIC is the right investment in your portfolio.
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 FLIC going forward? Our analyst growth expectation chart helps visualize FLIC’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether FLIC is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on FLIC 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.