Valuing QCRH, 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. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Emphasizing factors such as book values, in addition to the return and cost of equity, may be practical for assessing QCRH’s valuation. Below we’ll take a look at how to value QCRH in a reasonably effective and simple way. See our latest analysis for QCR Holdings
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 have significant portions of physical assets as part of total assets. This means the Excess Returns model is best suited for calculating the intrinsic value of QCRH rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
Deriving QCRH’s True Value
The main 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 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)
= (12.25% – 9.90%) * $30.03 = $0.71
Excess Return Per Share is used to calculate the terminal value of QCRH, 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)
= $0.71 / (9.90% – 2.47%) = $9.49
Combining these components gives us QCRH’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $30.03 + $9.49 = $39.53
Compared to the current share price of $44.45, QCRH is trading in-line with its true value. Therefore, there’s a bit of a downside if you were to buy QCRH today. Pricing is one part of the analysis of your potential investment in QCRH. Analyzing fundamental factors are equally important when it comes to determining if QCRH 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 QCRH going forward? Our analyst growth expectation chart helps visualize QCRH’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether QCRH is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on QCRH 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.