On today’s TSX Breakouts report, there are 73 stocks on the positive breakouts list (stocks with positive price momentum), and 11 securities are on the negative breakouts list (stocks with negative price momentum).
Several bank stocks have surfaced on the positive breakouts list given the recent strength in their share prices. Featured today is a bank stock with solid earnings growth that appeared on the positive breakouts list last week - Toronto-Dominion Bank (TD-T).
Over the past month, shares of TD are up 9 per cent. However, this price appreciation has not been accompanied by high trading volume. Consequently, the positive price momentum may pause in the near-term ahead of the release of its fourth-quarter financial results on Dec. 1.
A brief outline on TD is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
TD Bank is North America’s sixth-largest bank and second-largest bank in Canada as measured by total assets with $1.8-trillion in assets as at July 31.
In the third-quarter of fiscal 2021, the company’s earnings mix was 60 per cent Canadian retail, 29 per cent U.S. retail, 7 per cent wholesale, and 7 per cent came from the company’s investment in Charles Schwab.
The company trades on the Toronto Stock Exchange and the New York Stock Exchange under the same ticker, TD.
Quarterly earnings
Before the market opened on Aug. 25, the company reported its third-quarter fiscal 2022 financial results (fiscal year-end is Oct. 31). Adjusted earnings per share came in at $2.09, ahead of the Street’s expectations of $2.05 and up nearly 7 per cent year-over-year.
The Canadian Retail segment reported record revenue of $7-billion and net income of $2.3-billion, up 6 per cent year-over-year. In Canadian Retail, net interest margin (or NIM, which is calculated by dividing net interest income by average interest earning assets) expanded to 2.7 per cent from 2.62 per cent reported last quarter. The U.S. Retail segment saw its net income rise 1 per cent year-over-year to US$898-million, while NIM jumped to 2.62 per cent from 2.21 per cent reported last quarter. At quarter-end, the Common Equity Tier 1 Capital ratio stood at 14.9 per cent, up slightly from 14.7 per cent reported last quarter.
That day, the share price rallied nearly 1 per cent.
Chief risk officer Ajai Bambawale concluded management’s prepared remarks on the earnings call stating, “In summary, the bank continued to exhibit strong credit performance this quarter as evidenced by continued low gross impaired loan formations, gross impaired loans and PCLs [provision for credit losses]. While these key credit metrics are at or near cyclical low levels, economic risks remain elevated, reflective of persistent inflation and rising interest rates and the increasing risk of a recession. TD, however, remains well positioned given we are adequately provisioned. We have a strong capital position, and we have a business that is broadly diversified across products and geographies.”
Before the market opens on Dec. 1, the company will be releasing its fourth-quarter fiscal 2022 financial results. The consensus earnings per share estimate currently stands at $2.07.
Dividend policy
The company pays its shareholders a quarterly dividend of 89 cents per share, or $3.56 per share on a yearly basis. This equates to an annualized dividend yield of 4 per cent.
The payout ratio was 43 per cent for the nine months ending July 31, 2022, which is near the bottom of management’s targeted payout range of between 40 per cent and 50 per cent of adjusted earnings, suggesting there is room for further dividend increases.
Analysts’ recommendations
According to Bloomberg, there are 15 analysts actively covering this stock, which nine analysts have buy-equivalent recommendations and six analysts have neutral recommendations.
Revised recommendations
Earlier this month, Desjardins’ Doug Young tweaked his target price to $103 from $104.
Financial forecasts
Analysts are forecasting healthy earnings growth for TD.
According to Bloomberg, the consensus earnings per share( EPS) estimates are $8.24 for fiscal 2022, up from $7.91 reported in fiscal 2021, rising 8 per cent to $8.91 in fiscal 2023. The fiscal 2024 consensus EPS estimate is $9.51.
Earnings forecasts have been relatively stable. For instance, four months ago, the consensus earnings per share estimates were $8.19 for fiscal 2022 and $8.88 for fiscal 2023.
Looking at its peers, earnings per share estimates are as follows for fiscal 2022 and fiscal 2023:
- Bank of Montreal (BMO-T) $13.36 rising 8 per cent to $14.41;
- Bank of Nova Scotia (BNS-T) $8.47 rising 1 per cent to $8.53;
- Canadian Imperial Bank of Commerce (CM-T) $7.40 rising 2 per cent to $7.56;
- Royal Bank of Canada (RY-T) $11.19 rising 6 per cent to $11.89.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 9.9 times the fiscal 2023 consensus estimate, which is below its 10-year historical average of 11.7 times and close to its trough multiple of approximately 9.8 times over this time period.
If the multiple were to expand to 11.7 times (the 10-year average), this would equate to a share price of over $96 based on the current fiscal 2023 consensus estimate.
Relative to its peers, only one of the ‘Big 5′ banks trades at a higher multiple, Royal Bank with a P/E multiple of 11.1 times. Shares of Bank of Montreal, CIBC and Scotiabank are trading at multiples of 9.4, 8.6 and 8.1 times, respectively.
According to Bloomberg, the average one-year target price is just over $99, implying the share price may appreciate nearly 12 per cent over the next 12 months.
Insider transaction activity
Most recently, Ajay Virmani purchased 11,765 shares at a price per share of $84.97 on Aug. 31, initiating a position in this particular account. The cost of this investment totaled nearly $1-million.
Mr. Virmani is the founder and chief executive officer of Cargojet Inc. (CJT-T) and was appointed to TD’s board of directors in August.
Chart watch
Year-to-date, the stock price has declined nearly 8 per cent, which is in-line with the S&P/TSX Financials (sector) index.
Over the past month, the share price has rallied 9 per cent; however, this price strength has not been accompanied by high trading volume.
In terms of key technical resistance and support levels, the stock is approaching an initial ceiling of resistance around $90, near its 200-day moving average (at $91.40). After that, there is technical resistance around $100. On a pullback, there is support around $80.
ESG Risk Rating
According to risk provider Sustainalytics, TD has an ESG (environmental, social and governance) risk score of risk score of 19.9 as of September 21, 2022. A risk score of between 10 and 20 reflects a “low risk” rating.
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.
This report is not an investment recommendation.
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