Janus Henderson Group plc (NYSE:JHG) Is Trading 23% Below Its True Value
One of the most difficult industry to value is capital markets, given that they adhere to different rules compared to other companies. For example, capital market businesses are required to hold more capital to reduce the risk to shareholders. Examining line items such as book values, on top of the return and cost of equity, may be beneficial for gauging JHG’s value. Today I’ll take you through how to value JHG in a reasonably effective and easy method. See our latest analysis for Janus Henderson Group
What Is The Excess Return Model?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. The regulatory environment in United Kingdom is fairly rigorous. Furthermore, capital markets tend to not have large portions of physical assets on their balance sheet. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.
Deriving JHG’s Intrinsic Value
The main 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)
= (12.04% – 8.61%) * $28.11 = $0.96
Excess Return Per Share is used to calculate the terminal value of JHG, 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)
= $0.96 / (8.61% – 2.47%) = $15.71
Putting this all together, we get the value of JHG’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $28.11 + $15.71 = $43.82
Compared to the current share price of $33.88, JHG is trading below what it’s actually worth. This means you can buy JHG at a discount to its value of $43.82. Valuation is only one side of the coin when you’re looking to invest, or sell, JHG. Analyzing fundamental factors are equally important when it comes to determining if JHG has a place in your holdings.
Next Steps:
For capital markets, 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 leverage and risk.
Future earnings: What does the market think of JHG going forward? Our analyst growth expectation chart helps visualize JHG’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether JHG is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on JHG 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.
