Valuing MDLY, a financial stock, can be daunting since these capital market firms generally have cash flows that are impacted by regulations that are not imposed upon other industries. Asset managers, for example, must hold certain levels of capital in order to maintain a safe cash cushion. Focusing on elements such as book values, on top of the return and cost of equity, can be suitable for estimating MDLY’s true value. Today I will show you how to value MDLY in a reasonably useful and straightforward method. View our latest analysis for Medley Management
What Is The Excess Return Model?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. Strict regulatory environment in United States’s finance industry reduces MDLY’s financial flexibility. In addition to this, capital markets generally don’t hold significant portions of physical assets on their balance sheet. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.
Calculating MDLY’s Value
The main belief for this model 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)
= (-122.34% – 12.21%) * $-1.15 = $1.55
Excess Return Per Share is used to calculate the terminal value of MDLY, 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)
= $1.55 / (12.21% – 2.47%) = $15.91
Putting this all together, we get the value of MDLY’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $-1.15 + $15.91 = $14.76
Relative to the present share price of $6.5, MDLY is , at this time, undervalued. This means MDLY can be bought today at a discount. Valuation is only one side of the coin when you’re looking to invest, or sell, MDLY. Fundamental factors are key to determining if MDLY fits with the rest of your portfolio holdings.
Next Steps:
For capital markets, there are three key aspects you should look at:
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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.
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Future earnings: What does the market think of MDLY going forward? Our analyst growth expectation chart helps visualize MDLY’s growth potential over the upcoming years.
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Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether MDLY is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on MDLY 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.