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# Southside Bancshares Inc (NASDAQ:SBSI) Investors Are Paying Above The Intrinsic Value

SBSI 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. For instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Focusing on elements such as book values, on top of the return and cost of equity, may be suitable for calculating SBSIâ€™s intrinsic value. Below Iâ€™ll look at how to value SBSI in a reasonably effective and uncomplicated way.

### What Is The Excess Return Model?

Two main things that set financial stocks apart from the rest are regulation and asset composition. Financial firms operating in United States face strict financial regulation. Moreover, banks usually do not have large 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.

### Deriving SBSIâ€™s Intrinsic Value

The key 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 above the cost of equity is known as excess returns:

Excess Return Per Share = (Stable Return On Equity â€“ Cost Of Equity) (Book Value Of Equity Per Share)

= (11.68% â€“ 9.96%) x \$23.14 = \$0.40

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity â€“ Expected Growth Rate)

= \$0.40 / (9.96% â€“ 2.95%) = \$5.69

Putting this all together, we get the value of SBSIâ€™s share:

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

= \$23.14 + \$5.69 = \$28.83

This results in an intrinsic value of \$28.83. Relative to the present share price of US\$34.72, SBSI is currently priced above its true value. Therefore, thereâ€™s no benefit to buying SBSI today. Pricing is only one aspect when youâ€™re looking at whether to buy or sell SBSI. Analyzing fundamental factors are equally important when it comes to determining if SBSI has a place in your 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 SBSI going forward? Our analyst growth expectation chart helps visualize SBSIâ€™s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether SBSI is a dividend Rockstar with our historical and future dividend analysis.

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