One of the most difficult industry to value is banking, given that they adhere to different rules compared to other companies. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Emphasizing elements such as book values, along with the return and cost of equity, is appropriate for gauging MBFI’s valuation. Today I’ll look at how to value MBFI in a relatively effective and easy approach. See our latest analysis for MB Financial
What Model Should You Use?
Two main things that set financial stocks apart from the rest are regulation and asset composition. The regulatory environment in United States is fairly rigorous. Furthermore, banks generally don’t hold substantial portions of physical assets on their books. 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 MBFI’s True Value
The central assumption for this model 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)
= (9.45% – 9.96%) * $34.9 = $-0.18
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)
= $-0.18 / (9.96% – 2.95%) = $-2.54
Combining these components gives us MBFI’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $34.9 + $-2.54 = $32.36
Relative to the present share price of $49.43, MBFI is , at this time, priced above its true value. This means MBFI isn’t an attractive buy right now. Valuation is only one side of the coin when you’re looking to invest, or sell, MBFI. There are other important factors to keep in mind when assessing whether MBFI 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 MBFI going forward? Our analyst growth expectation chart helps visualize MBFI’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether MBFI is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on MBFI 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.