Intrinsic Calculation For Mediobanca Banca di Credito Finanziario SpA (BIT:MB) Shows Investors Are Overpaying

MB operates in the banking industry, which has characteristics that make it unique compared to other sectors. Understanding these differences is crucial when it comes to putting a value on the bank stock. For instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Emphasizing line items such as book values, in addition to the return and cost of equity, may be useful for evaluating MB’s valuation. Today we’ll take a look at how to value MB in a fairly useful and easy method. Check out our latest analysis for Mediobanca Banca di Credito Finanziario

What Is The Excess Return Model?

There are two facets to consider: regulation and type of assets. Strict regulatory environment in Italy’s finance industry reduces MB’s financial flexibility. In addition to this, banks generally don’t possess significant portions of physical assets on their balance sheet. Excess Returns overcome some of these issues. Firstly, it doesn’t focus on factors such as capex and depreciation – relevant for tangible asset firms – but rather emphasize forecasting stable earnings and book values.

BIT:MB Intrinsic Value June 21st 18

Deriving MB’s True 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)

= (8.32% – 13.08%) x €11.28 = €-0.54

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)

= €-0.54 / (13.08% – 1.79%) = €-4.75

Combining these components gives us MB’s intrinsic value per share:

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

= €11.28 + €-4.75 = €6.53

This results in an intrinsic value of €6.53. Relative to today’s price of €8.03, MB is currently priced higher than its intrinsic value. This means there’s no upside in buying MB at its current price. Valuation is only one side of the coin when you’re looking to invest, or sell, MB. There are other important factors to keep in mind when assessing whether MB is the right investment in your portfolio.

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 MB going forward? Our analyst growth expectation chart helps visualize MB’s growth potential over the upcoming years.

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

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