One of the most difficult industry to value is banking, given that they adhere to different rules compared to other companies. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Emphasizing factors such as book values, in addition to the return and cost of equity, can be appropriate for evaluating PEBO’s valuation. Today we will look at how to value PEBO in a reasonably effective and simple method.
What Is The Excess Return Model?
Let’s keep in mind two things – regulation and type of assets. United States’s financial regulatory environment is relatively strict. In addition, banks generally don’t have substantial amounts of physical assets on their books. So the Excess Returns model is suitable for determining the intrinsic value of PEBO rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
How Does It Work?
The central 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 – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.11% – 8.8%) x $27.87 = $0.48
Excess Return Per Share is used to calculate the terminal value of PEBO, 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)
= $0.48 / (8.8% – 2.9%) = $8.21
These factors are combined to calculate the true value of PEBO’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $27.87 + $8.21 = $36.08
This results in an intrinsic value of $36.08. Relative to the present share price of US$32.75, PEBO is fairly priced by the market. This means PEBO isn’t an attractive buy right now. Pricing is only one aspect when you’re looking at whether to buy or sell PEBO. Fundamental factors are key to determining if PEBO fits with the rest of your portfolio holdings.
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 PEBO going forward? Our analyst growth expectation chart helps visualize PEBO’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether PEBO is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on PEBO 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 email@example.com.