Shares of Republic New York Corp. jumped in value on Wednesday after the bank was selected as Merrill Lynch & Co.'s "Focus One Stock" of the week.
"That means it is our best firm-wide idea right now," said Merrill analyst Judah S. Kraushaar, who reiterated near-term and long-term 'buy" ratings on the banking company.
Shares of Republic were up 62.5 cents for the day to $55.75 on brisk volume. They traded as high as $56.625.
"We've been actively recommending Republic for a good part of this year," Mr. Kraushaar noted. "The reasons are fourfold"
First and most importantly, he said, "we see a decisive shift in the company's earnings mix over the next five years toward the private banking business, which we think is a high-multiple business."
The analyst said he believes the potential exists for the earnings Republic gets from private banking to double, from 30% of TK TK currently to almost 60% by the year 2000.
Second, Mr. Kraushaar said, Republic fits Merrill's criteria of a bank that is likely to enjoy an improving return on equity during the next couple of years "in an environment where we think most banks will have trouble sustaining returns."
Third, the analyst thinks Republic will be immune to concerns about consumer loans that may develop "to the degree that the U.S. economy slows down later this year."
Finally, the analyst noted, Republic's stock "has been and continues to be a laggard." It has recently sold at around 135% of book value, making it one of the cheapest stock in Merrill's universe.
The undervaluation has persisted, he said, because "despite a S2.5 billion market cap, the company is not widely followed and the market doesn't know how to categorize the bank."
As a result, investors are underestimating the bank's capacity to produce a positive earnings surprise and rising returns, he said.
On an operating basis, Mr. Kraushaar estimates Republic will earn $5.80 per share this year and $7 next year. His price objective for the stock is the upper $70 range by yearend 1996.
The "Focus One Stock" is chosen each Wednesday by a special investment committee at Merrill in conjunction with the overall views of the firm's market strategists and technicians.
Bank analyst Merrill H. Ross of Wheat First Butcher Singer Inc. Richmond, Va., Wednesday upgraded shares of Meridian Bancorp and downgraded those of Baltimore-based Mercantile Bankshares.
Meridian, based in Reading, Pa., was raised to "hold" from an "underperform" rating.
"The stock's recent foray over $40 was a reasonable level to take some profits, in our opinion, but we now believe that pricing is more in line with earnings expectations," Ms. Ross said.
Meridian shares were off 6.25 cents to $36.75 in Wednesday afternoon trading.
The analyst cut her rating on Mercantile to "neutral" from "outperform" after the company's shares topped her $25 price target.
Ms. Ross said he downgraded the shares "with regret" and stressed that the move was based on price and not on fundamental changes at the bank.
"They've had a nice run in (share) price and the quarterly earnings were good, but I just don't think you should apply a hefty multiple to forward earnings in this sector right now," she said.
"From current levels," Ms. Ross said, "we think it would be difficult for new holders to achieve returns that outperform the broader market over the next 12 months."
Mercantile shares were up 25 cents at $25.50.