What Value Should You Place On Moelis & Company (NYSE:MC)?
Pricing capital market stocks such as MC 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. Asset managers, for example, must hold certain levels of capital in order to maintain a safe cash cushion. Focusing on factors like book values, with the return and cost of equity, can be appropriate for assessing MC’s true value. Today we’ll take a look at how to value MC in a fairly useful and easy way.
See our latest analysis for Moelis
What Is The Excess Return Model?
Let’s keep in mind two things – regulation and type of assets. MC operates in United States which has stringent financial regulations. In addition, capital markets generally don’t possess substantial amounts of physical assets on their balance sheet. Therefore the Excess Returns model is appropriate for deriving the true value of MC as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.
Calculating MC’s Value
The central assumption 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)
= (0.56% – 11%) x $6.67 = $3.02
Excess Return Per Share is used to calculate the terminal value of MC, 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)
= $3.02 / (11% – 2.9%) = $39.78
Combining these components gives us MC’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $6.67 + $39.78 = $46.45
This results in an intrinsic value of $46.45. Compared to the current share price of US$36.49, MC is currently priced beneath its true value. Therefore, there is potential room to profit from mispricing if you bought MC at $46.45. Pricing is only one aspect when you’re looking at whether to buy or sell MC. There are other important factors to keep in mind when assessing whether MC is the right investment in your portfolio.
Next Steps:
For capital markets, 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 leverage and risk.
Future earnings: What does the market think of MC going forward? Our analyst growth expectation chart helps visualize MC’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether MC is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on MC here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
