UniCredit SpA (BIT:UCG) Investors Are Paying Above The Intrinsic Value

One of the most difficult industry to value is banking, given that they adhere to different rules compared to other companies. For instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Examining data points like book values, in addition to the return and cost of equity, may be fitting for assessing UCG’s intrinsic value. Below we’ll take a look at how to value UCG in a reasonably effective and easy approach. Check out our latest analysis for UniCredit

Why Excess Return Model?

Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. Italy’s financial regulatory environment is relatively strict. Furthermore, banks tend to not possess substantial amounts of tangible assets on their books. 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:UCG Intrinsic Value June 22nd 18

How Does It Work?

The key belief for Excess Returns 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 above the cost of equity is known as excess returns:

Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (7.29% – 13.08%) x €26.86 = €-1.56

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)

= €-1.56 / (13.08% – 1.79%) = €-13.77

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

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

= €26.86 + €-13.77 = €13.09

This results in an intrinsic value of €13.09. Given UCG’s current share price of €14.36, UCG is , at this time, fairly priced by the market. Therefore, there’s a bit of a downside if you were to buy UCG today. Pricing is one part of the analysis of your potential investment in UCG. There are other important factors to keep in mind when assessing whether UCG 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 UCG going forward? Our analyst growth expectation chart helps visualize UCG’s growth potential over the upcoming years.

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

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