In this series, we are going to value the common equity shares of Wells Fargo (NYSE:WFC), U.S. Bancorp (NYSE:USB) and PNC Financial (NYSE:PNC). In this article, we'll use a present value dividend discount model and the price-sales multiplier model to value the common equity shares. In the previous article we examined the effectiveness of management and financial performance.
Present Value Dividend Discount Model
I'm waiting for the bottom in Well Fargo's revenue. That said, net income is increasing. With those factors considered, currently Wells Fargo is fairly valued. I estimate intrinsic value using a present value dividend discount model. If the share price were to decline 10 to 20 percent from the current level of $34, I would consider Wells Fargo undervalued. Based on my model, I estimate the intrinsic value to be somewhere between $35 and $45-share.
In terms of U.S. Bancorp, the financial performance has been splendid. The firm is growing revenue at a time when a lot of financial firms are seeing revenue decline. With that factored in, I consider U.S. Bancorp to be fairly valued. I used a present value dividend discount model to estimate the intrinsic value as somewhere between $35 and $44-share. If the share price declined 10 to 20 percent, I would consider purchasing shares depending on other value relevant factors.
PNC is fairly valued. However, the firm could be considered moderately undervalued. Given the recent softness in the value relevant fundamentals, the firm is more likely fairly valued. We'll see how the revenue decline plays out. That said, I would still consider purchasing shares of the firm on a 15+ percent decline.
The estimates of intrinsic value assumes the dividends remain the same over the next 12 months.
The price-sales valuation metric is near the year's high. On a short-term basis Wells Fargo is overvalued. Sales over the past five years increased 8.92 percent. Sales in the most recent quarter versus the year-ago quarter declined less than one percent. The current price-sales value for the twelve trailing months is 3.69.
The price-sales valuation metric is near the year's high. On a short-term basis U.S. Bancorp is overvalued. Sales over the past five years increased 0.61 percent. Sales in the most recent quarter versus the year-ago quarter increased 3.5 percent. The current price-sales value for the twelve trailing months is 4.99.
The price-sales valuation metric is near the year's low. On a short-term basis PNC is fairly valued. Sales over the past five years increased 17.19 percent. Sales in the most recent quarter versus the year-ago quarter increased 9.8 percent. The current price-sales value for the twelve trailing months is 3.22.
Based on the multiplier model, it appears that U.S. Bancorp is overvalued. U.S. Bancorp's sales over the past five years grew at the slowest pace, yet the firm's price-sales ratio is the highest. Further, the current pace of sales doesn't justify the premium valuation. That said, based on the growth rates of sales, PNC appears undervalued.
To be continued...
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.