Bailey Pemberton
4 min read
First Horizon has delivered a very strong share price gain over the past few years, yet its latest mortgage portfolio shake up and net loss raise a fresh question about whether the current valuation is supported by the returns it earns on its capital. With the stock now resetting after recent weakness, investors are asking how well the business is using each dollar of equity to justify where the price sits today.
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Over the past 3 years, First Horizon has returned about 138.9%, which puts real pressure on the company to keep earning high enough returns on its capital for that kind of performance to stack up.
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The planned sale of roughly US$4.5b of lower yielding mortgages and redeployment into potentially higher yielding loans can change the mix of assets that drives First Horizon’s return on equity and long term capital efficiency.
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Prefer to judge First Horizon on earnings? See why First Horizon’s 15.9x P/E tells a different valuation story.
The issue now is whether First Horizon’s share price can be explained by the returns it earns on the capital shareholders have put into the business.
If you want to stress test this same capital returns question across a wider set of banks, line First Horizon up against solid balance sheet and fundamentals stocks screener (25 results)
Is First Horizon Still Cheap on Excess Returns?
The Excess Returns model looks at how profit on equity compares with the cost of that equity over time. For First Horizon, the key inputs are a Book Value of $17.19 per share and a Stable Book Value of $18.85 per share, with Stable EPS of $2.27 per share based on future Return on Equity estimates from 12 analysts. The implied Average Return on Equity sits at 12.06%, while the Cost of Equity is $1.36 per share, leaving an Excess Return of $0.91 per share that the framework treats as value created above the required charge for capital.
For a reader watching the $22.88 share price, that spread between return and cost suggests the model sees ongoing value generation from First Horizon’s equity base rather than one off gains. Because the recent US$4.5b mortgage sale led to a quarterly net loss, the Excess Returns output helps explain why the market may still be cautious even though the projections incorporate a positive gap between return and capital charge. The Excess Returns projections put First Horizon’s estimated intrinsic value substantially above the current share price, and you can see the detailed output here. Find out what First Horizon could be worth using our Excess Returns estimate.
