Valuing GBCI, 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. For example, banks are required to hold more capital to reduce the risk to depositors. Focusing on line items such as book values, with the return and cost of equity, is appropriate for gauging GBCI’s valuation. Today I’ll take you through how to value GBCI in a fairly useful and straightforward approach. Check out our latest analysis for Glacier Bancorp
Why Excess Return Model?
Let’s keep in mind two things – regulation and type of assets. Financial firms operating in United States face strict financial regulation. Moreover, banks usually do not hold large amounts of physical assets as part of total assets. Excess Returns overcome some of these issues. Firstly, it doesn’t focus on factors such as capex and depreciation – relevant for tangible asset firms – but rather emphasize forecasting stable earnings and book values.
How Does It Work?
The central assumption for Excess Returns 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 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)
= (12.78% – 9.88%) * $18.76 = $0.54
Excess Return Per Share is used to calculate the terminal value of GBCI, 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)
= $0.54 / (9.88% – 2.47%) = $7.33
Combining these components gives us GBCI’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $18.76 + $7.33 = $26.1
Relative to today’s price of $40.14, GBCI is priced higher than its intrinsic value. Therefore, there’s no benefit to buying GBCI today. Valuation is only one part of your investment analysis for whether to buy or sell GBCI. Fundamental factors are key to determining if GBCI fits with the rest of your portfolio holdings.
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 GBCI going forward? Our analyst growth expectation chart helps visualize GBCI’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether GBCI is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on GBCI 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.