Yahoo Finance Is There An Opportunity With Record plc’s (LON:REC) Mispricing?
REC operates in the capital markets sector, which has characteristics that make it unique to other industries. Understanding these differences is crucial when it comes to putting a value on the financial stock. 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. Examining elements like book values, along with the return and cost of equity, can be beneficial for estimating REC’s intrinsic value. Today I will show you how to value REC in a reasonably accurate and straightforward approach.
Check out our latest analysis for Record
What Model Should You Use?
There are two facets to consider: regulation and type of assets. Financial firms operating in United Kingdom face strict financial regulation. In addition, capital markets usually do not hold large portions of physical assets on their books. 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.
How Does It Work?
The central 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)
= (0.16% – 8.3%) x £0.15 = £0.012
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)
= £0.012 / (8.3% – 1.4%) = £0.18
Putting this all together, we get the value of REC’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= £0.15 + £0.18 = £0.33
This results in an intrinsic value of £0.33. Compared to the current share price of UK£0.30, REC is priced in-line with its intrinsic value. Therefore, there’s a bit of a downside if you were to buy REC today. Pricing is only one aspect when you’re looking at whether to buy or sell REC. Analyzing fundamental factors are equally important when it comes to determining if REC has a place in your holdings.
Next Steps:
For capital markets, there are three key aspects you should look at:
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.
Future earnings: What does the market think of REC going forward? Our analyst growth expectation chart helps visualize REC’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether REC is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on REC here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
