PEBO operates in the banking industry, which has characteristics that make it unique compared to other sectors. Understanding these differences is crucial when it comes to putting a value on the bank stock. The tiered capital structure is common for banks to abide by, in order to ensure they maintain a sufficient level of cash for their customers. Looking at elements such as book values, on top of the return and cost of equity, may be appropriate for estimating PEBO’s value. Below I will show you how to value PEBO in a relatively effective and straightforward approach. See our latest analysis for Peoples Bancorp
What Is The Excess Return Model?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. Strict regulatory environment in United States’s finance industry reduces PEBO’s financial flexibility. In addition, banks usually do not have large portions of tangible assets on their balance sheet. 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.
How Does It Work?
The main assumption 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 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)
= (10.18% – 8.49%) * $27.42 = $0.46
Excess Return Per Share is used to calculate the terminal value of PEBO, 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)
= $0.46 / (8.49% – 2.47%) = $7.68
Combining these components gives us PEBO’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $27.42 + $7.68 = $35.11
Compared to the current share price of $35.48, PEBO is , at this time, trading in-line with its true value. This means there’s no real upside in buying PEBO at its current price. Valuation is only one side of the coin when you’re looking to invest, or sell, PEBO. Analyzing fundamental factors are equally important when it comes to determining if PEBO has a place in your holdings.
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 PEBO going forward? Our analyst growth expectation chart helps visualize PEBO’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether PEBO is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on PEBO 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.