CTBI operates in the banking 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 the bank stock. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Focusing on data points such as book values, along with the return and cost of equity, is practical for computing CTBI’s value. Today I’ll determine how to value CTBI in a relatively useful and easy method. See our latest analysis for Community Trust Bancorp
What Model Should You Use?
There are two facets to consider: regulation and type of assets. Strict regulatory environment in United States’s finance industry reduces CTBI’s financial flexibility. Furthermore, banks tend to not hold significant amounts of physical assets as part of total assets. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
Calculating CTBI’s Value
The central belief 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 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)
= (9.99% – 9.87%) * $33.01 = $0.04
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)
= $0.04 / (9.87% – 2.47%) = $0.52
Combining these components gives us CTBI’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $33.01 + $0.52 = $33.53
Compared to the current share price of $44.7, CTBI is priced higher than its intrinsic value. Therefore, there’s no benefit to buying CTBI today. Valuation is only one side of the coin when you’re looking to invest, or sell, CTBI. Fundamental factors are key to determining if CTBI fits with the rest of your portfolio 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 CTBI going forward? Our analyst growth expectation chart helps visualize CTBI’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether CTBI is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on CTBI 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.