Morses Club Plc (LON:MCL) Investors Are Paying Above The Intrinsic Value
One of the most difficult industry to value is consumer finance, given that they adhere to different rules compared to other companies. For example, businesses that deal with loans are required to hold more capital to reduce the risk to shareholders. Looking at data points like book values, along with the return and cost of equity, may be suitable for estimating MCL’s value. Below I’ll look at how to value MCL in a reasonably effective and uncomplicated method. Check out our latest analysis for Morses Club
Why Excess Return Model?
Two main things that set financial stocks apart from the rest are regulation and asset composition. MCL operates in United Kingdom which has stringent financial regulations. Furthermore, consumer financials usually do not possess large portions of tangible assets on their balance sheet. So the Excess Returns model is suitable for determining the intrinsic value of MCL rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
The Calculation
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)
= (17.05% – 8.30%) * £0.57 = £0.05
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)
= £0.05 / (8.30% – 1.49%) = £0.73
These factors are combined to calculate the true value of MCL’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= £0.57 + £0.73 = £1.3
Given MCL’s current share price of £1.31, MCL is priced in-line with its intrinsic value. This means MCL isn’t an attractive buy right now. Valuation is only one side of the coin when you’re looking to invest, or sell, MCL. There are other important factors to keep in mind when assessing whether MCL is the right investment in your portfolio.
Next Steps:
For consumer financials, 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 MCL going forward? Our analyst growth expectation chart helps visualize MCL’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether MCL is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on MCL 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.
