Advertisement
U.S. markets close in 2 hours 24 minutes
  • S&P 500

    5,249.43
    +0.94 (+0.02%)
     
  • Dow 30

    39,748.45
    -11.63 (-0.03%)
     
  • Nasdaq

    16,372.98
    -26.54 (-0.16%)
     
  • Russell 2000

    2,125.32
    +10.97 (+0.52%)
     
  • Crude Oil

    82.76
    +1.41 (+1.73%)
     
  • Gold

    2,238.90
    +26.20 (+1.18%)
     
  • Silver

    24.91
    +0.16 (+0.64%)
     
  • EUR/USD

    1.0800
    -0.0029 (-0.27%)
     
  • 10-Yr Bond

    4.2020
    +0.0060 (+0.14%)
     
  • GBP/USD

    1.2626
    -0.0012 (-0.09%)
     
  • USD/JPY

    151.3540
    +0.1080 (+0.07%)
     
  • Bitcoin USD

    70,675.03
    +1,513.23 (+2.19%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Is There An Opportunity With Walker & Dunlop Inc’s (NYSE:WD) 53% Undervaluation?

Pricing bank stocks such as WD is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. For example, businesses that deal with loans are required to hold more capital to reduce the risk to shareholders. Focusing on factors such as book values, with the return and cost of equity, can be suitable for assessing WD’s valuation. Below we will look at how to value WD in a fairly accurate and easy way. View our latest analysis for Walker & Dunlop

What Model Should You Use?

Two main things that set financial stocks apart from the rest are regulation and asset composition. WD operates in United States which has stringent financial regulations. Moreover, mortgage and thrift companies tend to not have substantial 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.

NYSE:WD Intrinsic Value Jan 2nd 18
NYSE:WD Intrinsic Value Jan 2nd 18

How Does It Work?

The key 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 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)

= (23.16% – 9.08%) * $23.75 = $4.52

Excess Return Per Share is used to calculate the terminal value of WD, 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)

= $4.52 / (9.08% – 2.47%) = $68.41

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

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

= $23.75 + $68.41 = $100.52

Compared to the current share price of $47.5, WD is , at this time, priced beneath its true value. This means you can buy WD at a discount to its value of $100.52. Valuation is only one part of your investment analysis for whether to buy or sell WD. Analyzing fundamental factors are equally important when it comes to determining if WD has a place in your holdings.

Next Steps:

For mortgage and thrift companies, 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 WD going forward? Our analyst growth expectation chart helps visualize WD’s growth potential over the upcoming years.

3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether WD is a dividend Rockstar with our historical and future dividend analysis.

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

Advertisement