Is First Republic Bank (NYSE:FRC) Worth $90.24 Based On Intrinsic Value?
Pricing bank stocks such as FRC is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Looking at elements such as book values, with the return and cost of equity, may be practical for gauging FRC’s value. Below I’ll take you through how to value FRC in a relatively accurate and straightforward method. Check out our latest analysis for First Republic Bank
Why Excess Return Model?
Let’s keep in mind two things – regulation and type of assets. The regulatory environment in United States is fairly rigorous. In addition, banks generally don’t have substantial portions of tangible assets as part of total assets. This means the Excess Returns model is best suited for calculating the intrinsic value of FRC rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
Calculating FRC’s Value
The key belief for this model is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. 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)
= (11.31% – 9.90%) * $51.23 = $0.72
Excess Return Per Share is used to calculate the terminal value of FRC, 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)
= $0.72 / (9.90% – 2.47%) = $9.72
These factors are combined to calculate the true value of FRC’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $51.23 + $9.72 = $60.95
Relative to the present share price of $90.24, FRC is , at this time, overvalued. This means there’s no upside in buying FRC at its current price. Pricing is only one aspect when you’re looking at whether to buy or sell FRC. There are other important factors to keep in mind when assessing whether FRC is the right investment in your portfolio.
Next Steps:
For banks, 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 FRC going forward? Our analyst growth expectation chart helps visualize FRC’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether FRC is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on FRC 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.
