Valley National Bancorp (NYSE:VLY) Investors Are Paying Above The Intrinsic Value
Pricing VLY, 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 instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Looking at data points such as book values, with the return and cost of equity, can be practical for determining VLY’s intrinsic value. Below we’ll take a look at how to value VLY in a relatively effective and easy approach. View our latest analysis for Valley National Bancorp
What Model Should You Use?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. VLY operates in United States which has stringent financial regulations. Moreover, banks tend to not have substantial portions of tangible assets on their balance sheet. This means the Excess Returns model is best suited for calculating the intrinsic value of VLY rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
How Does It Work?
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 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)
= (10.62% – 9.90%) * $9.84 = $0.07
Excess Return Per Share is used to calculate the terminal value of VLY, 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)
= $0.07 / (9.90% – 2.47%) = $0.94
Putting this all together, we get the value of VLY’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $9.84 + $0.94 = $10.79
Relative to today’s price of $12.71, VLY is , at this time, priced in-line with its intrinsic value. This means VLY isn’t an attractive buy right now. Pricing is one part of the analysis of your potential investment in VLY. Analyzing fundamental factors are equally important when it comes to determining if VLY has a place in your holdings.
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 VLY going forward? Our analyst growth expectation chart helps visualize VLY’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether VLY is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on VLY 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.
