FRC Price Drops. What Do the Numbers Tell Us?

Standing out among the Street's worst performers today is First Republic Bank, a regional banking company whose shares slumped -15.6% to a price of $113.69, 33.48% below its average analyst target price of $170.9. The average analyst rating for the stock is buy. FRC lagged the S&P 500 index by -13.8% so far today and by -18.0% over the last year, returning -36.0%.

First Republic Bank, together with its subsidiaries, provides private banking, private business banking, and private wealth management services to clients in metropolitan areas in the United States. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.

First republic bank's trailing 12 month P/E ratio is 14.0, based on its trailing Eps of $8.11. The company has a forward P/E ratio of 12.2 according to its forward Eps of $9.35 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US financial services companies is 13.34, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The problem with P/E ratios is that they don't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations. We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 1.69 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's is overvalued in terms of its expected growth levels.

To get a sense of the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, First Republic's operating margins have averaged 35.6% and displayed a mean growth rate of 1.3%. These numbers show that the company has a relatively strong footing. To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in First Republic's free cash flow, which was $1,006,000,000.00 as of its most recent annual report.

Over the last 4 years, the company's average free cash flow has been $784,082,250.00 and they've been growing at an average rate of 30.6%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in FRC have received an annualized dividend yield of 0.7% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. First Republic's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.6, but is still below the average P/B ratio of the Financial Services sector, which stood at 1.95 as of the third quarter of 2022.

Since it has an average P/E ratio, a lower P/B ratio than the sector average, and a steady stream of strong cash flows with an upwards trend, FIRST REPUBLIC BANK is likely undervalued at today's prices. The company has mixed growth indicators because of an average PEG ratio and decent and consistent operating margins that are stable. We hope you enjoyed this overview of FRC's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.