Bank stocks such as UBSI are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Looking at elements like book values, as well as the return and cost of equity, can be practical for evaluating UBSI’s value. Today I’ll look at how to value UBSI in a fairly accurate and uncomplicated approach. See our latest analysis for United Bankshares
What Model Should You Use?
Let’s keep in mind two things – regulation and type of assets. Strict regulatory environment in United States’s finance industry reduces UBSI’s financial flexibility. In addition, banks generally don’t possess significant portions of tangible assets as part of total assets. This means the Excess Returns model is best suited for calculating the intrinsic value of UBSI rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
How Does It Work?
The central assumption for this model 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 above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (6.85% – 8.49%) * $31.09 = $-0.52
Excess Return Per Share is used to calculate the terminal value of UBSI, 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)
= $-0.52 / (8.49% – 2.47%) = $-8.69
These factors are combined to calculate the true value of UBSI’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $31.09 + $-8.69 = $23.24
Compared to the current share price of $35.9, UBSI is currently trading above what it’s actually worth. This means there’s no upside in buying UBSI at its current price. Pricing is only one aspect when you’re looking at whether to buy or sell UBSI. There are other important factors to keep in mind when assessing whether UBSI is the right investment in your portfolio.
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 UBSI going forward? Our analyst growth expectation chart helps visualize UBSI’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether UBSI is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on UBSI 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.