Pricing bank stocks such as LKFN is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. 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, with the return and cost of equity, may be appropriate for calculating LKFN’s valuation. Below I’ll take you through how to value LKFN in a reasonably useful and straightforward way. Check out our latest analysis for Lakeland Financial

Why Excess Return Model?

There are two facets to consider: regulation and type of assets. The regulatory environment in United States is fairly rigorous. In addition to this, banks tend to not have significant amounts 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.

Calculating LKFN’s Value

The central assumption 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)

= (15.33% – 9.87%) * $21.76 = $1.19

Excess Return Per Share is used to calculate the terminal value of LKFN, 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)

= $1.19 / (9.87% – 2.47%) = $16.07

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

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

= $21.76 + $16.07 = $37.83

Compared to the current share price of $48.24, LKFN is currently trading above what it’s actually worth. Therefore, there’s no benefit to buying LKFN today. Valuation is only one part of your investment analysis for whether to buy or sell LKFN. Analyzing fundamental factors are equally important when it comes to determining if LKFN has a place in your 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 LKFN going forward? Our analyst growth expectation chart helps visualize LKFN’s growth potential over the upcoming years.

3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether LKFN is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on LKFN 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.