U.S. markets closed
  • S&P 500

    3,443.12
    +16.20 (+0.47%)
     
  • Dow 30

    28,308.79
    +113.37 (+0.40%)
     
  • Nasdaq

    11,516.49
    +37.61 (+0.33%)
     
  • Russell 2000

    1,617.71
    +4.08 (+0.25%)
     
  • Crude Oil

    41.51
    +0.05 (+0.12%)
     
  • Gold

    1,913.70
    -1.70 (-0.09%)
     
  • Silver

    24.88
    -0.10 (-0.40%)
     
  • EUR/USD

    1.1837
    +0.0008 (+0.07%)
     
  • 10-Yr Bond

    0.7970
    +0.0360 (+4.73%)
     
  • GBP/USD

    1.2950
    +0.0003 (+0.02%)
     
  • USD/JPY

    105.4900
    +0.0200 (+0.02%)
     
  • BTC-USD

    11,946.63
    +889.62 (+8.05%)
     
  • CMC Crypto 200

    239.54
    +0.62 (+0.26%)
     
  • FTSE 100

    5,889.22
    +4.57 (+0.08%)
     
  • Nikkei 225

    23,567.04
    -104.09 (-0.44%)
     

Intrinsic Calculation For Tristate Capital Holdings Inc (NASDAQ:TSC) Shows Investors Are Overpaying

Valuing TSC, 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. 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. Looking at line items like book values, on top of the return and cost of equity, can be suitable for calculating TSC’s intrinsic value. Today we’ll take a look at how to value TSC in a reasonably useful and uncomplicated method.

View our latest analysis for Tristate Capital Holdings

What Model Should You Use?

Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. The regulatory environment in United States is fairly rigorous. In addition, banks usually do not have large amounts of physical assets as part of total assets. So the Excess Returns model is suitable for determining the intrinsic value of TSC rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.

NasdaqGS:TSC Intrinsic Value Export November 9th 18
NasdaqGS:TSC Intrinsic Value Export November 9th 18

How Does It Work?

The central 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)

= (0.12% – 11%) x $17.13 = $0.21

Excess Return Per Share is used to calculate the terminal value of TSC, 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)

= $0.21 / (11% – 2.9%) = $2.65

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

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

= $17.13 + $2.65 = $19.78

This results in an intrinsic value of $19.78. Compared to the current share price of US$25.43, TSC is priced higher than its intrinsic value. Therefore, there’s no benefit to buying TSC today. Pricing is only one aspect when you’re looking at whether to buy or sell TSC. Fundamental factors are key to determining if TSC fits with the rest of your portfolio 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 TSC going forward? Our analyst growth expectation chart helps visualize TSC’s growth potential over the upcoming years.

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

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

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.