Pricing PUB, a financial stock, can be difficult since these banks have cash flows that are affected by regulations that are not imposed upon other sectors. For example, banks are required to hold more capital to reduce the risk to depositors. Focusing on elements like book values, along with the return and cost of equity, may be useful for estimating PUB’s value. Below I will take you through how to value PUB in a relatively effective and easy way. Check out our latest analysis for People’s Utah Bancorp
Why Excess Return Model?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. Strict regulatory environment in United States’s finance industry reduces PUB’s financial flexibility. In addition to this, banks generally don’t hold substantial amounts of tangible assets as part of total assets. While traditional DCF models emphasize on inputs such as capital expenditure and depreciation, which is less useful for a financial stock, the Excess Return model focuses on book values and stable earnings.
Deriving PUB’s True Value
The main assumption 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 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)
= (14.27% – 9.92%) * $16.29 = $0.71
Excess Return Per Share is used to calculate the terminal value of PUB, 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)
= $0.71 / (9.92% – 2.47%) = $9.5
These factors are combined to calculate the true value of PUB’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $16.29 + $9.5 = $25.78
Relative to today’s price of $31.95, PUB is priced above its true value. This means there’s no upside in buying PUB at its current price. Valuation is only one part of your investment analysis for whether to buy or sell PUB. There are other important factors to keep in mind when assessing whether PUB is the right investment in your portfolio.
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 PUB going forward? Our analyst growth expectation chart helps visualize PUB’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether PUB is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on PUB 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.