On Monday, major North American stock markets closed in positive territory.
In the U.S., the Dow Jones Industrial Average gained 0.41 per cent, the S&P 500 index increased 0.48 per cent to a record close along with the Nasdaq composite index, which advanced 0.46 per cent.
In Canada, the S&P/TSX composite index rallied 92 points, or 0.59 per cent. There were 176 securities in the TSX Index that advanced, 72 securities declined in value, and two stocks closed the day unchanged. It was a broad rally with most sectors in the TSX index, 10 of the 11 sectors, closing the trading session with gains.
Year to date, the TSX Index is up 2.24 per cent. In the U.S., the Dow Jones Industrial Average is up 6.17 per cent year-to-date, the S&P500 index is up 7.30 per cent, and the Nasdaq composite has rallied 14.24 per cent.
On today's TSX Breakouts report, there are 45 stocks on the positive breakouts list (stocks with positive price momentum), and 19 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a stock that recently appeared on the negative breakouts list – the Bank of Montreal (BMO-T). The stock will be kicking off the second quarter bank earnings season, reporting its quarterly results before the market opens on Wednesday, May 24. The Street is anticipating earnings per share of $1.92.
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
The Bank of Montreal is the eighth-largest bank in North America as measured by assets. As of the end of the first-quarter, BMO had total assets of $692-billion. In terms of geographical breakdown, as of Jan. 31, 70 per cent of adjusted net income over the last 12 months was from Canada, 24 per cent stemmed from the U.S., and a small balance came from other regions.
Before the market opened on Feb. 28, the company reported better-than-expected financial results that sent the share price rallying 2.2 per cent that day. Adjusted earnings per share came in at $2.28, handily exceeding the consensus estimate of $1.87. Adjusted return on equity increased to 15.3 per cent, and the Common Equity Tier 1 (CET1) ratio increased to 11.1 per cent from 10.1 per cent reported last quarter.
Returning capital to shareholders
Based on history, shareholders may see a dividend increase announced on May 24. The company has announced a hike in its dividend by 2 cents per share every other quarter since 2014.
The company currently pays shareholders a quarterly dividend of 88 cents per share, or $3.52 on a yearly basis. This equates to an annualized yield of 3.7 per cent.
In the first quarter, the payout ratio was 39.5 per cent, suggesting there is room for dividend expansion. Management targets a payout ratio of between 40 per cent and 50 per cent.
Management has not been actively repurchasing shares as part of its share buyback program.
Analysts' recommendations
The majority of analysts are neutral on the stock, neither bullish nor bearish. There are just two buy recommendations, 12 hold recommendations, and two sell recommendations.
The 16 firms providing recent research coverage on the company are as follows in alphabetical order: Barclays, CIBC World Markets, Cormark Securities, Credit Suisse, Desjardins Securities, Edward Jones, Eight Capital, Keefe, Bruyette & Woods, Macquarie, Morningstar, National Bank Securities, Rafferty Capital Markets, RBC Capital Markets, Scotia Capital, TD Securities and Veritas Investment Research.
Revised recommendations
Earlier this month, two analysts tweaked their target prices lower. Doug Young, the analyst from Desjardins Securities, trimmed his target price to $102 from $104. Richard Bove, the analyst from Rafferty Capital Markets, reduced his target price to $74.78 (U.S.) from $76 (U.S.).
After the company reported its first quarter fiscal 2017 financial results, many analysts increased their expectations. In March, Robert Sedran from CIBC World Markets, raised his target price to $109 from $104. Sumit Malhotra, the analyst from Scotia Capital, upgraded the stock to a 'sector outperform' from a 'sector perform' and raised his target price by $5 to $113. Mario Mendonca from TD Securities increased his target price to $110 from $105. Darko Mihelic from RBC Capital Markets lifted his target price to $110 from $106. Nike Stogdille from Credit Suisse hiked his target price by $3 to $103. Stephen Gordon Theriault from Eight Capital bumped his target price to $101 from $99. Mike Rizvanovic from Veritas Investment Research raised his target price to $93 (the low on the Street) from $85. Meny Grauman, the analyst at Cormark Securities, upgraded the stock to a 'buy' and increased his target price to $111 from $104. Finally, Jason Bilodeau from Macquarie increased his target price to $105 from $98.
Financial forecasts
The Street is forecasting earnings per share of $8.09 in fiscal 2017, up over 7 per cent from $7.52 reported in fiscal 2016, with earnings per share anticipated to increase 5 per cent to $8.48 in fiscal 2018.
Earnings revisions have been positive. For instance, three months ago, the consensus earnings per share estimates were $7.79 for fiscal 2017 and $8.27 for fiscal 2018.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 11.2 times the 2018 consensus estimate, in-line with its three-year historical average of 11.0 times but below its peak multiple of approximately 12.5 times during this time period.
Should the P/E multiple expand to 11.5 times, a relatively conservative assumption, the share price would be just below $100. Should the multiple contract to 10.5 times, the share price would be just under $90.
The average 12-month target price is $104.95, implying the share price has nearly 11 per cent upside potential over the next year. Target prices range from a low of $93 (at Veritas Investment Research) to a high of $113 (at Scotia Capital), suggesting a potential total return (price return plus dividend income) of between 2 per cent and 23 per cent. Individual target prices provided by 14 firms are as follows in numerical order: $93, $95, $101, $102, $102.18 (converted from $74.78 U.S.), $103, two at $105, $107, $109, two at $110, $111, and $113. Most analysts, 12 of the 14 forecasts, believe the share price will return to over $100, or provide a minimum total return of 10 per cent.
Insider transaction activity
After the company reported its first-quarter fiscal 2017 financial results, several insiders exercised their options and sold shares in the public market. The most recent transaction in the public market occurred in March. On March 20, Gilles Ouellette, the head of wealth management, exercised his options and sold the corresponding number of shares, 38,412 shares, that day at an average price per share of $100.50. Prior to that, on March 14, Christopher Begy, the U.S. country head, exercised his options and sold the corresponding number of shares, 32,593 shares, that same day at an average price per share of $102.776, reducing his portfolio's holdings to 625 shares. On March 7, Thomas Flynn, the chief financial officer, exercised his options and the same day sold the corresponding number of shares, 16,800 shares, at an average price per share of $103.52, reducing his portfolio's position to 4,455 shares. On March 6, the vice-chair, Frank Techar, exercised his options and the same day sold the corresponding number of shares, 63,581 shares, at an average price per share of $103.234, reducing his portfolio's position to 40,388 shares.
Chart watch
The financial sector in the S&P/TSX composite index has been relatively unchanged so far in 2017, declining 0.2 per cent. Price returns have been unimpressive for bank stocks with their share prices relatively flat year to date, ranging from a loss of 4 per cent (TD Securities' share price) to a gain of 3 per cent (Royal Bank's share price). The Bank of Montreal's share price is down 1.9 per cent, with the loss accelerating in recent weeks. Over the past two months, the stock price has been under pressure, falling over 8 per cent since March 7.
The stock is nearing oversold territory with a relative strength index reading of 36. Generally, a reading at or below 30 indicates an oversold condition.
Should the share price continue to decline, there is initial support around $93, which is close to its 200-day moving average (at $92.87). Failing that, there is support around $90.
On a recovery in the share price, the stock faces initial overhead resistance between $99 and $100, near its 50-day moving average (at $99.01). After that, there is resistance around $103.50, its closing price from March 7.
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.