Intrinsic Calculation For BancFirst Corporation (NASDAQ:BANF) Shows Investors Are Overpaying
Pricing bank stocks such as BANF 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 instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Looking at line items such as book values, on top of the return and cost of equity, is suitable for estimating BANF’s intrinsic value. Today I’ll look at how to value BANF in a fairly useful and uncomplicated way. See our latest analysis for BancFirst
What Model Should You Use?
Two main things that set financial stocks apart from the rest are regulation and asset composition. Strict regulatory environment in United States’s finance industry reduces BANF’s financial flexibility. In addition to this, banks tend to not hold large portions of tangible 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.
The Calculation
The key belief 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)
= (11.63% – 9.90%) * $28.65 = $0.5
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)
= $0.5 / (9.90% – 2.47%) = $6.67
Combining these components gives us BANF’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $28.65 + $6.67 = $35.32
Relative to the present share price of $54.4, BANF is currently overvalued. This means BANF isn’t an attractive buy right now. Pricing is one part of the analysis of your potential investment in BANF. There are other important factors to keep in mind when assessing whether BANF is the right investment in your portfolio.
Next Steps:
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 BANF going forward? Our analyst growth expectation chart helps visualize BANF’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether BANF is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on BANF 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.
