Pricing HOPE, a financial stock, can be difficult since these banks have cash flows that are affected by regulations that are not imposed upon other sectors. For instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Emphasizing line items like book values, in addition to the return and cost of equity, may be suitable for calculating HOPE’s value. Below I’ll take you through how to value HOPE in a fairly useful and uncomplicated approach. See our latest analysis for Hope Bancorp
What Is The Excess Return Model?
There are two facets to consider: regulation and type of assets. The regulatory environment in United States is fairly rigorous. Furthermore, banks generally don’t possess significant amounts of physical assets on their books. Excess Returns overcome some of these issues. Firstly, it doesn’t focus on factors such as capex and depreciation – relevant for tangible asset firms – but rather emphasize forecasting stable earnings and book values.
Calculating HOPE’s Value
The key 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)
= (8.56% – 9.75%) * $15.66 = $-0.19
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)
= $-0.19 / (9.75% – 2.47%) = $-2.58
Combining these components gives us HOPE’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $15.66 + $-2.58 = $13.08
Relative to the present share price of $19.04, HOPE is overvalued. This means there’s no upside in buying HOPE at its current price. Valuation is only one side of the coin when you’re looking to invest, or sell, HOPE. Analyzing fundamental factors are equally important when it comes to determining if HOPE has a place in your holdings.
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 HOPE going forward? Our analyst growth expectation chart helps visualize HOPE’s growth potential over the upcoming years.
- 3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether HOPE is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on HOPE 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.