Yahoo Finance What Value Should You Place On Navient Corporation (NASDAQ:NAVI)?
Valuing NAVI, a financial stock, can be daunting since consumer financials generally have cash flows that are impacted by regulations that are not imposed upon other industries. For instance, these lenders must hold a certain level of cash reserves on the books as a safety precaution. Looking at line items such as book values, along with the return and cost of equity, is appropriate for determining NAVI’s intrinsic value. Below we will look at how to value NAVI in a reasonably effective and straightforward approach. Check out our latest analysis for Navient
Why Excess Return Model?
Two main things that set financial stocks apart from the rest are regulation and asset composition. United States’s financial regulatory environment is relatively strict. Moreover, consumer financials usually do not hold large portions of tangible assets as part of total assets. 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.
Deriving NAVI’s Intrinsic Value
The central assumption 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)
= (13.12% – 11.28%) x $15.55 = $0.29
Excess Return Per Share is used to calculate the terminal value of NAVI, 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)
= $0.29 / (11.28% – 2.95%) = $3.43
These factors are combined to calculate the true value of NAVI’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $15.55 + $3.43 = $18.98
This results in an intrinsic value of $18.98. Relative to today’s price of US$13.38, NAVI is currently priced beneath its true value. This means NAVI can be bought today at a discount. Pricing is one part of the analysis of your potential investment in NAVI. There are other important factors to keep in mind when assessing whether NAVI is the right investment in your portfolio.
Next Steps:
For consumer financials, 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 NAVI going forward? Our analyst growth expectation chart helps visualize NAVI’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether NAVI is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on NAVI 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.
