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Is Northern Trust Corporation (NASDAQ:NTRS) Expensive For A Reason? A Look At The Intrinsic Value

Donald Bartholomew

NTRS operates in the capital markets sector, which has characteristics that make it unique to other industries. Understanding these differences is crucial when it comes to putting a value on the financial stock. Asset managers, for example, must hold certain levels of capital in order to maintain a safe cash cushion. Examining elements like book values, as well as the return and cost of equity, can be fitting for estimating NTRS’s intrinsic value. Today I will take you through how to value NTRS in a reasonably accurate and easy way.

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What Model Should You Use?

There are two facets to consider: regulation and type of assets. Financial firms operating in United States face strict financial regulation. In addition to this, capital markets usually do not hold large amounts of tangible 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.

NasdaqGS:NTRS Intrinsic Value Export January 13th 19

Deriving NTRS’s True Value

The key belief for this model 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)

= (0.16% – 11%) x $47.56 = $2.54

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)

= $2.54 / (11% – 2.9%) = $33.34

These factors are combined to calculate the true value of NTRS’s stock:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= $47.56 + $33.34 = $80.9

This results in an intrinsic value of $80.9. Relative to today’s price of US$85.65, NTRS is , at this time, fairly priced by the market. Therefore, there’s a bit of a downside if you were to buy NTRS today. Valuation is only one part of your investment analysis for whether to buy or sell NTRS. Analyzing fundamental factors are equally important when it comes to determining if NTRS has a place in your holdings.

Next Steps:

For capital markets, 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 leverage and risk.
  2. Future earnings: What does the market think of NTRS going forward? Our analyst growth expectation chart helps visualize NTRS’s growth potential over the upcoming years.
  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether NTRS is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on NTRS 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.