Yahoo Finance TD Ameritrade Holding Corporation (NASDAQ:AMTD) Is Trading At A 5.02% Discount
Pricing AMTD, a financial stock, can be difficult since these capital market businesses have cash flows that are affected by regulations that are not imposed upon other sectors. For example, capital market businesses are required to hold more capital to reduce the risk to shareholders. Focusing on line items like book values, in addition to the return and cost of equity, may be beneficial for computing AMTD’s value. Below we’ll take a look at how to value AMTD in a relatively accurate and easy method.
Check out our latest analysis for TD Ameritrade Holding
What Model Should You Use?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. AMTD operates in United States which has stringent financial regulations. In addition, capital markets usually do not have substantial amounts of physical assets as part of total assets. So the Excess Returns model is suitable for determining the intrinsic value of AMTD rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
The Calculation
The main belief 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 in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (23.55% – 8.6%) x $16.06 = $2.4
Excess Return Per Share is used to calculate the terminal value of AMTD, 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)
= $2.4 / (8.6% – 2.9%) = $42.58
Combining these components gives us AMTD’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $16.06 + $42.58 = $58.63
This results in an intrinsic value of $58.63. Relative to the present share price of US$55.69, AMTD is , at this time, priced in-line with its intrinsic value. This means AMTD isn’t an attractive buy right now. Valuation is only one part of your investment analysis for whether to buy or sell AMTD. Fundamental factors are key to determining if AMTD fits with the rest of your portfolio holdings.
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 AMTD going forward? Our analyst growth expectation chart helps visualize AMTD’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether AMTD is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on AMTD 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.
