Pricing CHFC, a financial stock, can be difficult since these banks have cash flows that are affected by regulations that are not imposed upon other sectors. For example, banks are required to hold more capital to reduce the risk to depositors. Examining line items like book values, with the return and cost of equity, is fitting for calculating CHFC’s true value. Below I will take you through how to value CHFC in a reasonably useful and straightforward method. View our latest analysis for Chemical Financial

Why Excess Return Model?

There are two facets to consider: regulation and type of assets. Strict regulatory environment in United States’s finance industry reduces CHFC’s financial flexibility. In addition to this, banks tend to not possess substantial portions of tangible assets on their books. 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.

Calculating CHFC’s Value

The central belief for Excess Returns 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 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)

= (10.01% – 9.76%) * $41.69 = $0.1

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)

= $0.1 / (9.76% – 2.47%) = $1.42

These factors are combined to calculate the true value of CHFC’s stock:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= $41.69 + $1.42 = $43.11

Compared to the current share price of $55.97, CHFC is priced higher than its intrinsic value. Therefore, there’s no benefit to buying CHFC today. Valuation is only one side of the coin when you’re looking to invest, or sell, CHFC. Fundamental factors are key to determining if CHFC fits with the rest of your portfolio holdings.

Next Steps:

For banks, there are three key aspects you should look at:

1. 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.

2. Future earnings: What does the market think of CHFC going forward? Our analyst growth expectation chart helps visualize CHFC’s growth potential over the upcoming years.