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FBC operates in the thrifts mortgage finance industry, which has characteristics that make it unique compared to other sectors. Understanding these differences is crucial when it comes to putting a value on these financial stocks. For instance, these lenders must hold a certain level of cash reserves on the books as a safety precaution. Looking at line items such as book values, as well as the return and cost of equity, may be beneficial for computing FBC’s true value. Below I’ll take you through how to value FBC in a relatively effective and uncomplicated method.
What Is The Excess Return Model?
There are two facets to consider: regulation and type of assets. Financial firms operating in United States face strict financial regulation. Moreover, mortgage and thrift companies tend to not hold large portions of tangible assets on their balance sheet. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
Deriving FBC’s Intrinsic Value
The key assumption 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 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)
= (0.12% – 10%) x $32.34 = $0.71
Excess Return Per Share is used to calculate the terminal value of FBC, 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)
= $0.71 / (10% – 2.7%) = $9.78
Putting this all together, we get the value of FBC’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $32.34 + $9.78 = $42.11
This results in an intrinsic value of $42.11. Compared to the current share price of US$32.34, FBC is priced beneath its true value. This means there’s an upside to buying FBC today. Valuation is only one side of the coin when you’re looking to invest, or sell, FBC. Fundamental factors are key to determining if FBC fits with the rest of your portfolio holdings.
For mortgage and thrift companies, 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 FBC going forward? Our analyst growth expectation chart helps visualize FBC’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether FBC is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on FBC here.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.