Is Preferred Bank (NASDAQ:PFBC) Worth $62.91 Based On Intrinsic Value?
Pricing bank stocks such as PFBC 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 instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Examining line items like book values, in addition to the return and cost of equity, is beneficial for determining PFBC’s intrinsic value. Below I’ll take you through how to value PFBC in a reasonably useful and uncomplicated approach. View our latest analysis for Preferred Bank
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, banks usually do not possess substantial amounts of physical assets on their books. 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.
Deriving PFBC’s True Value
The main belief 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)
= (18.47% – 9.90%) * $29.14 = $2.49
Excess Return Per Share is used to calculate the terminal value of PFBC, 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)
= $2.49 / (9.90% – 2.47%) = $33.56
These factors are combined to calculate the true value of PFBC’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $29.14 + $33.56 = $62.7
Relative to today’s price of $62.91, PFBC is , at this time, fairly priced by the market. Therefore, there’s a bit of a downside if you were to buy PFBC today. Valuation is only one side of the coin when you’re looking to invest, or sell, PFBC. There are other important factors to keep in mind when assessing whether PFBC is the right investment in your portfolio.
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 PFBC going forward? Our analyst growth expectation chart helps visualize PFBC’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether PFBC is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on PFBC 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.
