Ready Capital’s stock price has taken a beating over the past six months, shedding 34.4% of its value and falling to $4.37 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Ready Capital, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Ready Capital Will Underperform?
Even with the cheaper entry price, we're swiping left on Ready Capital for now. Here are three reasons why we avoid RC and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Net interest income and and fee-based revenue are the two pillars supporting bank earnings. The former captures profit from the gap between lending rates and deposit costs, while the latter encompasses charges for banking services, credit products, wealth management, and trading activities.
Over the last five years, Ready Capital grew its revenue at a tepid 2.5% compounded annual growth rate. This fell short of our benchmarks.
Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Ready Capital, its EPS declined by 19.9% annually over the last five years while its revenue grew by 2.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Declining TBVPS Reflects Erosion of Asset Value
For banks, tangible book value per share (TBVPS) is a crucial metric that measures the actual value of shareholders’ equity, stripping out goodwill and other intangible assets that may not be recoverable in a worst-case scenario.
To the detriment of investors, Ready Capital’s TBVPS continued freefalling over the past two years as TBVPS declined at a -16.7% annual clip (from $14.57 to $10.11 per share).
Final Judgment
Ready Capital falls short of our quality standards. After the recent drawdown, the stock trades at 0.4× forward P/B (or $4.37 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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