Using CFA level knowledge, I tried to calculate bank stock intrinsic value.
First, There three kinds of incomes (Net Income, Comprehensive Income, Net Income from continuing operation) on income statement. Does anybody know which income should I take in order to calcualte the intrinsic value?
Second, I think beta can be different depend on calculation periods, market situation (bullish, bearish).
Am I right? If so how can I calculate the correct beta?
Some internet sites shows different betas for same stock.
Depending on what discount rate you utilize on your DCF you could estimate the intrinsic value from all kinds of income (Net Income, EBITA, EBIT, etc.)
Valuing financial service companies have some peculiarities that makes it a bit different from other service/manufacturing companies.
From the top of my head, just be sure you include interest income as part of your operating income, and if you use market approach, Price to Book is the most widely utilized multiple for the industry.
I suggest you to read this paper. I used to review a fairness opinion for an insurance company. It will walk you through the main points.
No, you are not. Beta of a company depends on its capital structure and it changes accordingly to the amount of debt and equity. Since the market price of debt and equity changes continuously, hence, the beta fluctuates.
To determine beta of a particular company you need to run a regression of its operating income (net) against the return of a benchmark index over a period you consider to be appropriate.
Beta absolutely depends on calculation periods… compare a one year beta with a two year beta on the same stock. Heck, compare a two year beta using weekly calculations with a two year beta using monthly calculations, you’ll get different results depnding on the period.
I’ll agree that capital structure influences beta, but a company’s unlevered beta fluctuates as well. I have also never seen beta calculated as a regression of operating income against an index return.
Yes. beta varies in time. The mechanical calculation is simple, covariance of the stock return and the market return over variance of the market return.
Since the intrinsic value is long term, you need to avoid being caught in the cycles. That’s why some services show you the adjusted beta (1/3) + (2/3) * Raw Beta --> assuming in time al betas will revert to market (Beta =1).
If you are trying to get the intrinsic value for a privately held company, then use the beta from a set of companies you think best represents the subject company.
Bank valuation is a different animal. Banks trade at multiples to Book and Tangible Book, and the value of that premium/discount is often a function of things like regulatory capital, market demographics and capital structure.
My advice would be don’t get caught trying to treat a bank like an industrial. At this point in the cycle, earnings still mean less than book value. Growth premiums come from those banks which are able to organically grow commercial loans. Regarding your question on income, all three can be relevant and the most relevant depends on company structure. The comprehensive income for banks takes their AFS portfolios into account – it they are still having issues with marking Trust Preferreds, for example, that will show up in OCI.