NBT Bancorp Inc (NASDAQ:NBTB) Is Trading 0.028% Below Its True Value
One of the most difficult industry to value is banking, given that they adhere to different rules compared to other companies. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Examining line items like book values, in addition to the return and cost of equity, may be useful for determining NBTB’s true value. Today we’ll take a look at how to value NBTB in a fairly useful and straightforward approach.
See our latest analysis for NBT Bancorp
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 NBTB’s financial flexibility. In addition to this, banks tend to not have substantial portions of physical assets as part of total assets. 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.
Deriving NBTB’s Intrinsic Value
The central belief 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 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)
= (12.19% – 8.59%) x $24.23 = $0.87
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)
= $0.87 / (8.59% – 2.95%) = $15.47
These factors are combined to calculate the true value of NBTB’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $24.23 + $15.47 = $39.7
This results in an intrinsic value of $39.7. Given NBTB’s current share price of US$39.69, NBTB is , at this time, trading in-line with its true value. This means NBTB isn’t an attractive buy right now. Valuation is only one part of your investment analysis for whether to buy or sell NBTB. Analyzing fundamental factors are equally important when it comes to determining if NBTB has a place in your holdings.
Next Steps:
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 NBTB going forward? Our analyst growth expectation chart helps visualize NBTB’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether NBTB is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on NBTB here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
