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analysis

On today’s Breakouts report, there are 14 stocks on the positive breakouts list (stocks with positive price momentum), and 57 securities are on the negative breakouts list (stocks with negative price momentum).

Bank stocks are surfacing on the positive breakouts list ahead of their quarterly earnings releases next week. Appearing on the positive breakouts list are Toronto-Dominion Bank (TD-T) and the Bank of Nova Scotia (BNS-T), which both rallied on high volume on Tuesday. Discussed today is a bank stock that may soon join these two banks on the positive breakouts list - Bank of Montreal (BMO-T).

A brief outline on BMO is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

The Bank of Montreal is the eighth-largest bank in North America, as measured by assets, serving 12 million customers worldwide (8 million personal and commercial customers in Canada). As of the end of the third-quarter, BMO had total assets of $971-billion.

The company has three core business segments: Personal & Commercial (P&C) Banking, BMO Capital Markets, and BMO Wealth Management. As at July 31, 35 per cent of adjusted net income over the trailing 12 months came from Canadian P&C, 24 per cent from U.S. P&C, 24 per cent from BMO Capital Markets, and 17 per cent from BMO Wealth Management.

In terms of geographical breakdown, 57 per cent of adjusted net income over the last 12 months was from Canada as at July 31, 37 per cent from the U.S., and 6 per cent from other regions.

The stock is dual-listed trading on the Toronto Stock Exchange and the New York Stock Exchange under the same ticker, BMO.

Investment Thesis

  • Solid quarterly financial results.
  • Tailwind: Strong economic growth is forecast for Canada and the U.S.
  • Tailwind: Rising interest rate environment. Currently, the Street anticipates the Bank of Canada will increase its key overnight rate to 0.75 per cent in 2022, up from its current level of 0.25 per cent, and lift the overnight rate to 1.5 per cent in 2023.
  • Loan growth. Last quarter, average loan growth in the Canadian P&C banking division increased 3 per cent sequentially. The U.S. P&C banking segment lagged, declining 2 per cent quarter-over-quarter.
  • Excess capital. Potential catalysts: 1) large dividend hike(s); 2) share repurchases
  • Valuation: Room for multiple expansion as well as increases in earnings forecasts.
  • Series of earnings beats. For the past five quarters, the company has reported better-than-expected earnings results with the share price rallying between 1.5 per cent and 5.7 per cent on its reporting date.

Quarterly earnings

Before the market opened on Aug. 24, the company reported better-than-expected third-quarter financial results (its fiscal year-end ends Oct. 31) that sent the share price rising 1.7 per cent that day. Adjusted earnings per share came in at $3.44, handily exceeding the consensus estimate of $2.94. Adjusted return on equity increased to 17.6 per cent, and the Common Equity Tier 1 (CET1) ratio increased to 13.4 per cent from 13 per cent reported last quarter. The adjusted net efficiency ratio improved to 55.7 per cent.

The company will be releasing its fourth-quarter financial results before the market opens on Dec. 3. The Street is forecasting earnings per share to come in at $3.18. That day, management will host an earnings call at 8 a.m. ET.

Returning capital to shareholders

The company pays shareholders a quarterly dividend of $1.06 per share, or $4.24 per share on a yearly basis. This equates to a current annualized yield of 3 per cent.

Management targets a payout ratio of between 40 per cent and 50 per cent, implying the company has room for a significant dividend hike. Management acknowledged that its board of directors may decide to raise its dividend in one large move or perhaps through two smaller moves.

To be conservative, if we assume earnings per share of $12.60 and a payout ratio of 42 per cent (at the lower end of its targeted 40 to 50 per cent range), that would equate to an annual dividend of $5.29 per share, a 25-per-cent increase from its current annual dividend of $4.24 per share. A payout ratio of 45 per cent would equate to an annual dividend of $5.67, a 34-per-cent dividend increase.

At the beginning of the month, the Office of the Superintendent of Financial Institutions (OSFI) removed restrictions on dividend hikes and share buybacks.

At Barclays’ Virtual Global Financial Services Conference held in September, chief financial officer Tayfun Tuzun remarked on the company’s excess capital, “We are quite optimistic for our investors that we will be able to get back on track with our dividend payout ratio…it could take one or two moves, but it will be a quick catch-up period. Dividends alone will not get us back to the targeted capital ratios. So there’s clearly going to be some buybacks associated with it.”

Analysts’ recommendations

According to Bloomberg, the bank stock is covered by 14 analysts, of which eight analysts have buy recommendations, four analysts have neutral recommendations, and two analysts have sell recommendations (Veritas’ Nigel D’Souza and ISS-EVA’s Casey Lea).

The 14 firms providing recent research coverage on the company are: Barclays, Canaccord Genuity, CIBC World Markets, Cormark Securities, Credit Suisse, Desjardins Securities, Fundamental Research, ISS-EVA, Morningstar, National Bank Financial, RBC Dominion Securities, Scotia Capital, TD Securities and Veritas Investment Research.

Revised recommendations

Earlier this month, four analysts raised their target prices..

  • CIBC’s Paul Holden lifted his target price to $157 from $148.
  • Desjardins’ Doug Young upgraded his recommendation to a “buy” from a “hold” and bumped his target price to $146 from $138.
  • Scotia Capital’s Meny Grauman raised his target price to $161 (the high on the Street) from $147.
  • Vertias’ Nigel D’Souza raised his target price to $148 from $139.

Financial forecasts

According to Bloomberg, the Street is forecasting earnings per share of $12.65 in fiscal 2021, $12.57 in fiscal 2022, and $13.44 in fiscal 2023.

Earnings estimates have been rising. For instance, four months ago, the consensus earnings per share estimates were $11.86 for fiscal 2021 and $11.68 for fiscal 2022.

Ahead of the fourth-quarter earnings releases, the consensus earnings per share estimates for its industry peers have also been ticking up and are as follows:

  • Bank of Nova Scotia (BNS-T): $7.70 in fiscal 2021 and $7.96 in fiscal 2022.
  • Canadian Imperial Bank of Commerce (CM-T): $14.61 in fiscal 2021 and $14.43 in fiscal 2022.
  • Royal Bank of Canada (RY-T): $11.29 in fiscal 2021 and $11.20 in fiscal 2022.
  • Toronto-Dominion Bank (TD-T): $7.75 in fiscal 2021 and $7.84 in fiscal 2022.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 11.1 times the fiscal 2022 consensus estimate, relatively in-line with its 10-year historical average of 10.98 times and below its peak multiple of approximately 12.8 times during this time period.

Should the P/E multiple expand to 11.65 times with the consensus earnings per share estimate remaining unchanged (conservative assumptions), the target price would be approximately $146.50.

According to Bloomberg, the average 12-month target price is $147.24, implying the share price has 5 per cent upside potential over the next year. Target prices range from a low of $130 (at Morningstar) to a high of $161 (from Meny Grauman at Scotia). Individual target prices provided by 13 firms are as follows in numerical order: $130, $132, $134.29, $144, two at $146, $147, $148, two at $149, $150, $157, and $161.

Its peers are trading at the following forward P/E multiples:

  • Bank of Nova Scotia at 10.48 times (10-year average is 11.07 times).
  • CIBC at 10.34 times (10-year average is 9.95 times).
  • Royal Bank at 11.76 times (10-year average is 11.78)
  • TD Bank at a multiple of 12.14 times (10-year average is 11.64 times).

Insider transaction activity

Quarter-to-date, there has not been any trading activity in the public market reported by insiders.

Chart watch

Year-to-date, the share price has rallied 45 per cent, realizing the highest price return of the Big 5 banks. The second-best performing stock is CIBC with a price return of 37 per cent in 2021.

Looking at key technical support and resistance levels, the stock is trading just below an initial ceiling of resistance around $140, near its record closing high of $140.27 reached on Nov. 12. After that, there is overhead resistance around $150. Looking at the downside, there is initial technical support around $130, close to its 100-day moving average (at $130.01).

POSITIVE BREAKOUTSNov. 23 close
ALS-TAltius Minerals Corp $17.25
ARR-TAltius Renewable Royalties Corp. $11.12
BNS-TBank of Nova Scotia $83.40
DRM-TDREAM Unlimited Corp $34.86
ERF-TEnerplus Corp $13.40
FRX-TFennec Pharmaceuticals Inc. $12.33
FSV-TFirstService Corp $253.14
GRT-UN-TGranite Real Estate Investment Trust $100.97
PZA-TPizza Pizza Royalty Corp $12.13
PLZ-UN-TPlaza Retail REIT $4.62
SRX-TStorm Resources Ltd. $6.34
SYZ-TSylogist Ltd. $12.08
TD-TToronto-Dominion Bank $95.22
UNS-TUni-Select Inc $23.03
NEGATIVE BREAKOUTS
ABCT-TABC Technologies Holdings Inc. $7.22
ARE-TAecon Group Inc $16.81
AEZS-TAeterna Zentaris Inc. $0.61
AQN-TAlgonquin Power & Utilities Corp $17.62
ADW-A-TAndrew Peller Ltd $8.25
ORA-TAura Minerals Inc. $10.63
ACQ-TAutoCanada Inc $33.70
BRAG-TBragg Gaming Group Inc. $7.88
BEPC-TBrookfield Renewable Corporation $47.23
DOO-TBRP Inc $102.88
BU-TBurcon NutraScience Corp $1.56
CAE-TCAE Inc $34.20
CNE-TCanacol Energy Ltd $3.21
CAR-UN-TCanadian Apartment Properties REIT $57.93
CPX-TCapital Power Corp $40.27
CRDL-TCardiol Therapeutics Inc. $2.58
CJT-TCargojet Inc $177.42
CGG-TChina Gold International Resources Corp. $3.19
DOC-XCloudMD Software & Services Inc. $1.23
CRON-TCronos Group Inc. $5.93
DHT-UN-TDRI Healthcare Trust $6.81
EXE-TExtendicare Inc $6.98
FTRP-TField Trip Health Ltd. $5.42
FOBI-XFobi AI Inc. $1.49
FVI-TFortuna Silver Mines Inc $4.62
FOOD-TGoodfood Market Corp. $4.09
HAI-THaivision Systems Inc. $6.80
HEXO-THEXO Corp. $1.43
HLS-THLS Therapeutics Inc. $16.56
IAU-Ti-80 Gold Corp. $2.80
IVQ-U-TInvesque Inc. $1.68
KEY-TKeyera Corp $29.16
LAS-A-TLassonde Industries Inc $149.02
LB-TLaurentian Bank of Canada $39.44
LSPD-TLightspeed POS Inc. $67.67
MKP-TMCAN Mortgage Corp $17.65
MDF-TMDF Commerce Inc. $4.86
MMED-NEMind Medicine Inc. $2.57
MRT-UN-TMorguard Real Estate Investment Trust $5.45
MTY-TMTY Food Group Inc. $58.65
MTL-TMullen Group Ltd $12.04
NFI-TNew Flyer Industries Inc $21.81
NVEI-TNuvei Corporation $116.56
PBL-TPollard Banknote Ltd. $37.75
PBH-TPremium Brands Holdings Corp $128.30
PGM-XPure Gold Mining Inc. $0.80
RPI-UN-TRichards Packaging Income Fund $55.80
SOY-TSunOpta Inc. $8.23
THNC-TThinkific Labs Inc. $8.34
LCFS-TTidewater Renewables Ltd. $14.10
TOI-XTopicus.com Inc. $118.49
VCM-TVecima Networks Inc $15.20
VMD-TViemed Healthcare Inc. $6.79
VFF-TVillage Farms International $9.19
WFC-TWall Financial Corp. $15.25
WM-TWallbridge Mining Company Limited $0.44
WELL-TWell Health Technologies Corp. $5.81

Source: Bloomberg and The Globe and Mail

This report is not an investment recommendation. 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, financial forecasts, 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.

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