FBC operates in the thrifts mortgage finance 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 these financial stocks. These lenders, for example, must hold certain levels of capital in order to maintain a safe cash cushion. Looking at data points like book values, along with the return and cost of equity, may be fitting In assessing FBC’s true value. Today we’ll take a look at how to value FBC in a fairly accurate and straightforward method. View our latest analysis for Flagstar Bancorp
Why Excess Return Model?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. FBC operates in United States which has stringent financial regulations. In addition, mortgage and thrift companies usually do not have substantial amounts of physical assets on their balance sheet. This means the Excess Returns model is best suited for calculating the intrinsic value of FBC rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
Deriving FBC’s Intrinsic Value
The central 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)
= (10.29% – 9.39%) * $25.38 = $0.25
Excess Return Per Share is used to calculate the terminal value of FBC, 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)
= $0.25 / (9.39% – 2.47%) = $3.68
Combining these components gives us FBC’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $25.38 + $3.68 = $31.83
Relative to today’s price of $36.48, FBC is , at this time, fairly priced by the market. This means FBC isn’t an attractive buy right now. Pricing is only one aspect when you’re looking at whether to buy or sell FBC. There are other important factors to keep in mind when assessing whether FBC is the right investment in your portfolio.
For mortgage and thrift companies, 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 FBC going forward? Our analyst growth expectation chart helps visualize FBC’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether FBC is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on FBC 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.