Pricing WDR, 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. Maintaining a certain level of cash capital ratio is common for these financial firms to abide by, in order to minimize risks to their shareholders. Emphasizing line items like book values, on top of the return and cost of equity, may be beneficial for calculating WDR’s intrinsic value. Below I will show you how to value WDR in a fairly effective and straightforward approach. See our latest analysis for Waddell & Reed Financial
What Model Should You Use?
Two main things that set financial stocks apart from the rest are regulation and asset composition. Strict regulatory environment in United States’s finance industry reduces WDR’s financial flexibility. Moreover, capital markets generally don’t possess substantial portions of physical assets as part of total assets. So the Excess Returns model is suitable for determining the intrinsic value of WDR rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
Calculating WDR’s Value
The key 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 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)
= (17.66% – 8.80%) * $10.75 = $0.95
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)
= $0.95 / (8.80% – 2.47%) = $15.07
Putting this all together, we get the value of WDR’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $10.75 + $15.07 = $25.82
Relative to today’s price of $19.67, WDR is , at this time, trading below what it’s actually worth. This means WDR can be bought today at a discount. Pricing is only one aspect when you’re looking at whether to buy or sell WDR. Analyzing fundamental factors are equally important when it comes to determining if WDR has a place in your 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 WDR going forward? Our analyst growth expectation chart helps visualize WDR’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 WDR is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on WDR 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.