Launching Coverage of First Republic Bank
The firm receives a $160 per share fair value estimate and no-moat rating.
We are initiating coverage on First Republic Bank (FRC) with a $160 per share fair value estimate, no-moat rating, exemplary capital allocation rating, and a high uncertainty rating. We believe that the stock is roughly 20% overvalued based on the $202.85 closing price on Aug. 11.
First Republic is a growth machine with a conservative underwriting culture and superior customer service metrics, such as Net Promoter Scores and client attrition rates. In a mature industry such as U.S. banking, being able to consistently produce excess organic growth without having to worry about excess risk taking is a rare and powerful combination, and as such, we understand the attraction to the name.
However, we caution investors that with this high growth also comes a high degree of uncertainty about the future. Our valuation is quite sensitive to future growth assumptions as well as how much we assume the bank has to "pay" for that growth in the form of higher compensation and other investments. As such, the biggest upside risk we see is even better revenue growth than projected along with an ability to control expenses while generating that growth, and the biggest downside risk is any slowdown in growth for the bank along with the need to consistently "pay up" for that growth. Our upside scenario yields a fair value estimate of $207 and our downside scenario yields a fair value estimate of $102 per share. While we can get to today’s prices, with think a lot has to continue to go right for the bank for the next decade, and as such we think most of the upside is already priced in. We’re impressed with the underlying growth and culture of First Republic, but we think the market is also already very impressed with it, as well.
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Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.