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Is RBB Bancorp (NASDAQ:RBB) Expensive For A Reason? A Look At The Intrinsic Value

Bank stocks such as RBB are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. For example, banks are required to hold more capital to reduce the risk to depositors. Emphasizing data points like book values, as well as the return and cost of equity, is appropriate for calculating RBB’s true value. Below I will show you how to value RBB in a relatively effective and uncomplicated approach. Check out our latest analysis for RBB Bancorp

What Model Should You Use?

Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. Financial firms operating in United States face strict financial regulation. In addition, banks generally don’t have substantial portions of physical assets on their books. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.

NasdaqGS:RBB Intrinsic Value May 31st 18
NasdaqGS:RBB Intrinsic Value May 31st 18

Calculating RBB’s Value

The main 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)

= (12.58% – 9.86%) * $20.45 = $0.56

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

= $0.56 / (9.86% – 2.95%) = $8.03

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

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

= $20.45 + $8.03 = $28.48

Relative to the present share price of $30.37, RBB is priced in-line with its intrinsic value. This means there’s no real upside in buying RBB at its current price. Valuation is only one part of your investment analysis for whether to buy or sell RBB. Fundamental factors are key to determining if RBB fits with the rest of your portfolio holdings.

Next Steps:

For banks, 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 RBB going forward? Our analyst growth expectation chart helps visualize RBB’s growth potential over the upcoming years.

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

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

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