Pricing SBSI, a financial stock, can be difficult since these banks have cash flows that are affected by regulations that are not imposed upon other sectors. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Looking at data points like book values, on top of the return and cost of equity, can be beneficial for determining SBSI’s true value. Below I’ll determine how to value SBSI in a relatively effective and easy approach. Check out our latest analysis for Southside Bancshares
What Model Should You Use?
Let’s keep in mind two things – regulation and type of assets. United States’s financial regulatory environment is relatively strict. In addition, banks usually do not have significant portions of physical assets as part of total assets. Therefore the Excess Returns model is appropriate for deriving the true value of SBSI as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.
Deriving SBSI’s Intrinsic Value
The key 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)
= (11.68% – 9.98%) * $23.14 = $0.39
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)
= $0.39 / (9.98% – 2.95%) = $5.57
Combining these components gives us SBSI’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $23.14 + $5.57 = $28.71
Compared to the current share price of $34.88, SBSI is currently priced higher than its intrinsic value. This means there’s no upside in buying SBSI at its current price. Pricing is one part of the analysis of your potential investment in SBSI. There are other important factors to keep in mind when assessing whether SBSI 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 SBSI going forward? Our analyst growth expectation chart helps visualize SBSI’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether SBSI is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on SBSI 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.