Shares of regional bank First Republic Bank (NYSE:FRC) have lost 88% since the latest banking crisis broke roughly one month ago, causing two bank failures and a loss of confidence in many others.
Pick the best stocks and maximize your portfolio:
- Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
- Easily identify outperforming stocks and invest smarter with Top Smart Score Stocks
As the value of low-interest, long-term U.S. Treasury bonds declined in the face of rising interest rates, First Republic’s tangible equity — comprising largely the value of its investments if marked to market at current fair value — has fallen deeply into the red.
Wedbush analyst David Chiaverini estimates it at negative $13 billion, or negative $70 per share. This deeply negative value means that at present, it’s essentially impossible for First Republic to sell itself to any sane buyer, which would have to pay not only a price to acquire the bank, but also subtract the bank’s negative tangible book value from its own book value — effectively adding $13 billion to any hypothetical purchase price. As a result, Chiaverini concludes that First Republic Bank is basically unbuyable at present.
But that doesn’t mean you should necessarily sell First Republic Bank stock, says this analyst.
In fact, according to Chiaverini, at a share price 88% below what First Republic stock fetched just one month ago, the best course of action right now is probably to hold onto any First Republic stock you own, and hope the company can survive on its own until its investments mature in the natural course of things, returning their “mark to market” value back to something approaching what the investments were originally worth. Hence the analyst’s rating on the stock: “neutral,” or in other words: “hold.”
As Chiaverini explains, First Republic might still end up selling itself, if it can work out a deal in which a would-be acquirer receives guarantees from the FDIC that it will not incur losses from First Republic’s impaired investments. “The only acquisition scenario that is possible for FRC,” says the analyst, “is through [some sort of] receivership” deal like this. And should that happen, potential purchase prices for First Republic (and thus the value of First Republic stock to its shareholders) could end up being as little as $0 per share.
Nevertheless, the analyst seems to think that the more likely scenario is that First Republic “will attempt to grind it out as a standalone company for the foreseeable future and should be able to stave off receivership given FRC has sufficient liquidity to remain a going concern and its capital ratios remain above regulatory thresholds since it hasn’t been forced to realize the unrealized losses embedded in its balance sheet.”
Eventually, argues the analyst, investors could see First Republic emerge at the end of this crisis with the ability to shrink its balance sheet and earn perhaps $2.25 per share annually by 2025 — an amount that would value to stock at a cheap 6 times earnings at its current stock price — assuming the bank can survive that long, and that current investors have the patience to wait that long.
In the meantime, Chiaverini cautions investors to anticipate reported losses of anywhere from $3.75 to $4.00 per share this year, and another $2 to $2.50 per share in 2024. He seems to expect that these losses will cause First Republic’s share price to continue declining to about $8 over the next 12 months.
While Chiaverini remains Neutral on the stock, based on this analysis, the analyst might as well have said “sell.” (To review Chiaverini’s track record, click here)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
