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Intrinsic Calculation For Old Line Bancshares Inc (NASDAQ:OLBK) Shows Investors Are Overpaying

OLBK operates in the banking 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 the bank stock. 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 line items like book values, with the return and cost of equity, may be appropriate for assessing OLBK’s true value. Today I’ll determine how to value OLBK in a fairly useful and straightforward method. See our latest analysis for Old Line Bancshares

What Model Should You Use?

Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. OLBK operates in United States which has stringent financial regulations. Moreover, banks generally don’t hold significant portions of tangible assets as part of total assets. 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.

NasdaqCM:OLBK Intrinsic Value Apr 25th 18
NasdaqCM:OLBK Intrinsic Value Apr 25th 18

How Does It Work?

The key 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 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)

= (11.51% – 9.90%) * $23.04 = $0.37

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)

= $0.37 / (9.90% – 2.47%) = $5

These factors are combined to calculate the true value of OLBK’s stock:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= $23.04 + $5 = $28.04

Given OLBK’s current share price of $34.97, OLBK is currently priced above its true value. Therefore, there’s no benefit to buying OLBK today. Pricing is one part of the analysis of your potential investment in OLBK. Analyzing fundamental factors are equally important when it comes to determining if OLBK has a place in your holdings.

Next Steps:

For banks, there are three key aspects you should look at:

  1. 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.

  2. Future earnings: What does the market think of OLBK going forward? Our analyst growth expectation chart helps visualize OLBK’s growth potential over the upcoming years.

  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether OLBK is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on OLBK 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.

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