One of the most difficult industry to value is banking, given that they adhere to different rules compared to other companies. 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. Focusing on elements like book values, on top of the return and cost of equity, may be suitable for determining HBNC’s intrinsic value. Below I will show you how to value HBNC in a reasonably accurate and straightforward approach. See our latest analysis for Horizon Bancorp
What Model Should You Use?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. United States’s financial regulatory environment is relatively strict. Furthermore, banks usually do not hold substantial 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 HBNC’s True Value
The main 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 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)
= (11.81% – 9.92%) * $20.04 = $0.38
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)
= $0.38 / (9.92% – 2.47%) = $5.08
These factors are combined to calculate the true value of HBNC’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $20.04 + $5.08 = $25.12
Compared to the current share price of $29.81, HBNC is , at this time, fairly priced by the market. This means there’s no real upside in buying HBNC at its current price. Valuation is only one side of the coin when you’re looking to invest, or sell, HBNC. Analyzing fundamental factors are equally important when it comes to determining if HBNC has a place in your 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 HBNC going forward? Our analyst growth expectation chart helps visualize HBNC’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether HBNC is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on HBNC 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.