Yahoo Finance Is Cathay General Bancorp (NASDAQ:CATY) Expensive For A Reason? A Look At The Intrinsic Value
Valuing CATY, a bank stock, can be daunting since these financial companies have cash flows that are impacted by regulations that are not imposed upon other industries. The tiered capital structure is common for banks to abide by, in order to ensure they maintain a sufficient level of cash for their customers. Looking at data points such as book values, in addition to the return and cost of equity, can be suitable for evaluating CATY’s true value. Today I will show you how to value CATY in a relatively useful and uncomplicated method. View out our latest analysis for Cathay General Bancorp
What Is The Excess Return Model?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. CATY operates in United States which has stringent financial regulations. Moreover, banks tend to not possess significant amounts of tangible assets on their balance sheet. While traditional DCF models emphasize on inputs such as capital expenditure and depreciation, which is less useful for a financial stock, the Excess Return model focuses on book values and stable earnings.
How Does It Work?
The main belief for Excess Returns 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)
= (12.81% – 9.96%) x $27.49 = $0.78
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 – Expected Growth Rate)
= $0.78 / (9.96% – 2.95%) = $11.2
Combining these components gives us CATY’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $27.49 + $11.2 = $38.69
This results in an intrinsic value of $38.69. Relative to the present share price of US$42.95, CATY is currently trading in-line with its true value. This means there’s no real upside in buying CATY at its current price. Pricing is only one aspect when you’re looking at whether to buy or sell CATY. There are other important factors to keep in mind when assessing whether CATY is the right investment in your portfolio.
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 CATY going forward? Our analyst growth expectation chart helps visualize CATY’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether CATY is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on CATY 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.
