Yahoo Finance Is BofI Holding Inc (NASDAQ:BOFI) Worth US$042.4 Based On Intrinsic Value?
BOFI operates in the thrifts mortgage finance 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 these financial stocks. These lenders, for example, must hold certain levels of capital in order to maintain a safe cash cushion. Focusing on data points such as book values, as well as the return and cost of equity, is suitable for calculating BOFI’s valuation. Today I’ll determine how to value BOFI in a reasonably effective and simple method. See our latest analysis for BofI Holding
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 BOFI’s financial flexibility. Furthermore, mortgage and thrift companies generally don’t have substantial portions of tangible assets on their balance sheet. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
Calculating BOFI’s Value
The central 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)
= (18.7% – 9.60%) x $17.46 = $1.59
Excess Return Per Share is used to calculate the terminal value of BOFI, 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)
= $1.59 / (9.60% – 2.95%) = $23.91
These factors are combined to calculate the true value of BOFI’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $17.46 + $23.91 = $41.38
This results in an intrinsic value of $41.38. Relative to today’s price of US$42.40, BOFI is currently fairly priced by the market. Therefore, there’s a bit of a downside if you were to buy BOFI today. Pricing is one part of the analysis of your potential investment in BOFI. Analyzing fundamental factors are equally important when it comes to determining if BOFI has a place in your holdings.
Next Steps:
For mortgage and thrift companies, 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 bad loans and customer deposits.
Future earnings: What does the market think of BOFI going forward? Our analyst growth expectation chart helps visualize BOFI’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether BOFI is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on BOFI 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.
