On today’s TSX Breakouts report, there are 12 stocks on the positive breakouts list (stocks with positive price momentum), and 45 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a bank stock that is on the negative breakouts list as its valuation nears trough levels and the stock nears oversold territory: Canadian Imperial Bank of Commerce (CM-T). The share price has declined over 9 per cent since troubles at Silicon Valley Bank surfaced last month. The stock is approaching strong technical support between $50 and $53.
A brief outline on CIBC is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based CIBC is one of Canada’s largest financial institutions with approximately 13 million clients worldwide.
In its 2022 net income breakdown, 36 per cent stemmed from Canadian personal and business banking, 31 per cent was from capital markets, 30 per cent was from Canadian commercial banking and wealth management, 12 per cent was from U.S. commercial banking and wealth management, and negative 9 per cent was from corporate and other.
Investment thesis
· Earnings stability. Albeit, a lack of earnings growth.
· Solid balance sheet.
· Attractive valuation.
· Reliable dividend. Current dividend yield of 6.1 per cent.
· Key potential risks to consider: 1) economic slowdown/recession (i.e. risk of earnings misses, risk of a higher provision for credit losses, and risk of decelerating loan growth); and 2) negative investor sentiment for financial stocks (i.e. lack of buyers to drive the share price higher).
Quarterly earnings results
Before the market opened on Feb. 24, the company reported better-than-expected first-quarter financial results (fiscal year-end is Oct. 31). Adjusted earnings per share came in at $1.94, above the Street’s forecast of $1.73 but down 5 per cent from $2.04 reported during the same period last year. Net income from the Canadian personal and business banking segment was $589-million, down 14 per cent year-over-year. Net income from Canadian commercial banking and wealth management increased 2 per cent year-over-year to $469-million. U.S commercial banking and wealth management net income was $201-million, down roughly 11 per cent year-over-year. Capital Markets’ net income came in at $612-million, up 13 per cent year-over-year. The CET1 ratio (common equity tier 1) at quarter-end stood at 11.6 per cent, which management believes will increase to approximately 12 per cent by year-end. The adjusted return on equity ratio was 15.5 per cent. The share price rallied 2.7 per cent the following day on high volume.
Before the market opens on May 25, the company will be releasing its second-quarter fiscal 2023 financial results. The consensus earnings per share estimate currently stands at $1.68.
Industry conditions
In the Management’s Discussion and Analysis released in February, management highlighted the weak economic backdrop and challenging conditions. “In Canada, the Bank of Canada has increased the overnight rate to 4.5 per cent, which is expected to stay at elevated levels through the remainder of calendar 2023, thereby slowing demand to allow inflation to end next year near its 2 per cent target. Weaker economic growth, improvements in supply chains, and softer average prices for food and energy will be key to getting inflation back to that target. Real gross domestic product (GDP) growth is expected to decelerate to roughly 1 per cent for calendar 2023 from a growth rate of roughly 3.5 per cent in 2022, with a softening in housing and consumer spending in response to higher interest rates and a gradual climb in the unemployment rate to nearly 6 per cent by the end of calendar 2023, up from an average of 5.3 per cent in 2022. Long-term interest rates in both the U.S. and Canada could continue to climb through to mid-2023 as central banks signal that they will not be easing policy this year, but could end 2023 at lower levels as the market starts to look ahead to an easing in central bank policy rates in 2024, and gains confidence that inflation will be under control. In the U.S., the effort to contain inflation is likely to see the Federal Reserve take overnight rates just over 5 per cent by May 2023, leaving them at that level through the remainder of the year. The resulting drag on housing and interest sensitive consumption is expected to hold real GDP growth to 1.3 per cent in calendar 2023, down from 2.1 per cent in 2022. That should see the unemployment rate climb from an average of 3.6 per cent in 2022 to 4.3 per cent by the end of 2023, allowing wage inflation to decelerate. A softer pace for economic growth is likely to have broad implications across many of our strategic business units (SBUs). Rising unemployment and the recent increases in interest rates are likely to result in a moderate decrease in business and household credit quality from very strong levels achieved in 2022. Deposit growth will be contained, as quantitative tightening will require bonds currently held by the central bank to be financed in the public markets, with higher rates resulting in greater growth in term deposits relative to short-term deposits. While the rising interest rate environment is starting to level off, we expect a modestly positive impact on the net interest margins for all our SBUs, but the high interest rates may have implications for credit quality in 2023 as economic growth slows in response to monetary tightening. For Canadian Personal and Business Banking, mortgage growth is expected to remain soft in line with weaker home sales volumes and average house prices tied to the increase in interest rates. Although year-over-year non-mortgage consumer credit demand will be supported by additional volume gains in spending on services, lower inflation will feed into slower growth in dollar terms. Business lending is expected to register healthy growth, but is also likely to decelerate from the strong pace seen in 2022. Financial markets have opened this year in a more positive tone as softening in inflation has reduced the risks that a full blown recession will be needed to contain price pressures. While we could still see volatility ahead as earnings growth decelerates, Canadian and U.S. wealth management businesses should gain support as the year progresses and markets look ahead to better growth in 2024. Our Capital Markets business is expected to benefit as merger and acquisition activity recovers from current low levels, while corporate bond issuance could pick up as longer term rates ease later in 2023. Loan growth in our Canadian and U.S. commercial banking businesses is expected to continue to decelerate from levels seen in 2022 with softer economic growth and lower levels of residential construction.”
Dividend policy
The company pays its shareholders a quarterly dividend of 85 cents per share or $3.40 per share yearly, equating to a current dividend yield of 6.13 per cent.
Last quarter, the adjusted dividend payout ratio was 43.8 per cent, suggesting there is room for further dividend increases. In fiscal 2022, the adjusted dividend payout ratio was 46.3 per cent.
Analysts’ recommendations
The stock has three buys, 13 neutral calls, and one sell recommendation (from Veritas’ Nigel D’Souza).
Revised recommendations
Last month, two analysts revised their expectations.
· Canaccord’s Scott Chan lowered his target price to $63 from $66.50.
· RBC’s Darko Mihelic trimmed his target price by $1 to $69.
Financial forecasts
Relatively no earnings growth is anticipated by analysts over the next couple of years.
The consensus earnings per share estimates are $7.04 in fiscal 2023, relatively unchanged from $7.05 reported in fiscal 2022, and $7.10 in fiscal 2024.
Earnings estimates have been rising. To illustrate, three months ago, the Street was expecting earnings per share of $6.86 in fiscal 2023 and $6.97 in fiscal 2024.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 7.9 times the fiscal 2023 consensus estimate, below its 10-year historical average of 9.9 times. To put this in perspective, this multiple is near its lowest level over the past decade. In March 2020 (market meltdown from COVID news), the stock traded down to a multiple of 7.4 times. Shares of CIBC are trading at a P/E multiple of 7.8 times the fiscal 2024 consensus estimate, below its 10-year historical average of 9.5 times and near its trough level of 7.2 times reached in March 2020.
Looking at its peers, shares of CIBC are trading at the lowest valuation among the Big 5 bank stocks. Based on fiscal 2023 and 2024 consensus earnings, shares of Royal Bank (RY-T) are trading at P/E multiples of 11.1 times and 10.4 times, respectively. BMO shares are trading at 9 times and 8.6 times, respectively. Scotiabank shares are trading at 8.6 times and 8.2 times, respectively. Shares of TD Bank are trading at a P/E multiple of 9.2 times and 8.6 times, respectively.
CIBC’s average one-year target price is $65.27, suggesting the stock has over 17 per cent upside potential over the next year.
Insider transaction activity
On March 16, president and chief executive officer Victor Dodig invested $2-million in shares of CIBC. He acquired 34,850 shares at a price per share of $57.65, increasing this specific account’s holdings to 188,402 shares.
On March 10, Mr. Dodig invested nearly $3 million in shares of CIBC. He acquired 51,590 shares at a price per share of $58.08.
On March 13, chair of the board Katharine Stevenson bought a total of 1,600 shares for two accounts (LRSP and RRSP) at a price per share of $56.74. The total cost of these purchases exceeded $90,000.
On March 13, director Mary Lou Maher acquired 1,300 shares at a cost per share of $56.57, raising this particular account’s holdings to 3,356 shares.
Chart watch
Year-to-date, the share price is relatively unchanged, up 1 per cent, performing in-line with the S&P/TSX financials [sector] index, which is also up 1 per cent.
The share price may soon find technical support. The stock is approaching strong support between $50 and $53.
The stock is nearing oversold territory. The relative strength index (RSI) is at 31.6. Generally, an RSI reading at or below 30 reflects an oversold condition.
ESG Risk Rating
According to Sustainalytics, CIBC has an ESG (environmental, social and governance) risk rating of 17.7 as of Oct. 21, 2022. A rating of between 10 and 20 reflects ‘low’ risk.
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 indices 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.
This report should not be considered an investment recommendation.
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Jennifer Dowty