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. Looking at data points like book values, in addition to the return and cost of equity, can be useful for gauging HOMB’s intrinsic value. Below we’ll take a look at how to value HOMB in a fairly useful and uncomplicated method. View our latest analysis for Home Bancshares (Conway AR)
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. United States’s financial regulatory environment is relatively strict. In addition, banks usually do not hold substantial amounts of physical assets on their books. Excess Returns overcome some of these issues. Firstly, it doesn’t focus on factors such as capex and depreciation – relevant for tangible asset firms – but rather emphasize forecasting stable earnings and book values.
NasdaqGS:HOMB Intrinsic Value Apr 19th 18
The key belief for this model 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)
= (13.17% – 9.90%) * $14.49 = $0.47
Excess Return Per Share is used to calculate the terminal value of HOMB, 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)
= $0.47 / (9.90% – 2.47%) = $6.39
These factors are combined to calculate the true value of HOMB’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $14.49 + $6.39 = $20.87
Compared to the current share price of $21.91, HOMB is , at this time, fairly priced by the market. This means there’s no real upside in buying HOMB at its current price. Valuation is only one part of your investment analysis for whether to buy or sell HOMB. Analyzing fundamental factors are equally important when it comes to determining if HOMB has a place in your 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 HOMB going forward? Our analyst growth expectation chart helps visualize HOMB’s growth potential over the upcoming years.Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether HOMB is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on HOMB 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.