On today’s TSX Breakouts report, there are 50 stocks on the positive breakouts list (stocks with positive price momentum), and 21 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the negative breakouts list. Its share price has declined 5 per cent over the past 10 trading sessions, declining on the back of its recently announced bought deal financing with proceeds earmarked to fund the proposed acquisition of MD Financial Management. The stock is trading at a discount compared to its historical average. At the beginning of the month, two insiders were buying shares in the public market.
The security highlighted today is Bank of Nova Scotia (BNS-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
The Bank of Nova Scotia is a Canadian bank with international operations. The bank provides financial services across North America, Latin America, the Caribbean and Central America, Europe, as well as in Asia.
On May 31, the company announced plans to acquire Ottawa-based MD Financial Management. In order to finance this $2.585-billion purchase, the company announced a bought deal financing, issuing 19.7-million shares at a price per share of $76.15.
MD is a provider of financial planning services to Canadian doctors and their families. With over $49-billion in assets under administration, MD serves approximately 110,000 customers, comprised of 45,000 physicians and 65,000 family members. The acquisition is expected to be completed in the company’s fiscal fourth-quarter.
That day, management held a conference call to discuss the acquisition. President and chief executive officer Brian Porter stated on the call, “From a valuation perspective, the purchase price represents 5.3 per cent total AUM (assets under management) and AUA (assets under administration). We expect earnings per share to be accretive in the year three, excluding integration and amortization costs. Our common equity tier 1 ratio is expected to be impacted by approximately 30 basis points on closing of the transaction. We expect our common equity tier 1 ratio to be approximately 10.7 per cent by the end of Q4 ’18 (fourth quarter 2018). We also expect our common equity tier 1 capital ratio to be approximately 11 per cent by the end of Q1 ’19 (first quarter 2019), reflecting growth from internally generated capital as well as several smaller divestitures that are currently planned.”
On May 29, the company reported its second quarter fiscal 2018 financial results (the bank’s fiscal year-end is October 31). Reported adjusted earnings per share came in at $1.71, ahead of the consensus estimate of $1.67 and up 5 per cent year-over-year. Return on equity was 14.9 per cent, unchanged from same period last year. The Common Equity Tier 1 (CET 1) ratio was 12 per cent, up approximately 80 basis points.
Returning capital to investors
The company pays shareholders a quarterly dividend of 82 cents per share or $3.28 per share on a yearly basis. This equates to an annualized dividend yield of 4.3 per cent.
The company has a history of announcing dividend increases every other quarter. The next dividend hike will likely be announced in late-August, when the company is expected to report its third-quarter fiscal 2018 financial results.
Last quarter, the payout ratio was 48 per cent, within management’s targeted range of between 40 per cent and 50 per cent.
As at April 30, the company had repurchased approximately 2.25-million shares during the past six months at a volume weighted average price per share of $79.23.
Analysts’ recommendations
Since the beginning of June, 14 analysts have issued research reports on the company, of which 10 analysts have buy recommendations, three analysts have hold recommendations, and one analyst (from Veritas Investment Research) maintained his ‘sell’ recommendation.
Financial forecasts
The consensus earnings per share estimates are $7.03 in fiscal 2018 rising 6 per cent to $7.46 in fiscal 2019.
Earnings expectations have been trimmed in recent weeks. To illustrate, three months ago, the consensus earnings per share estimates were $7.06 for fiscal 2018 and $7.57 for fiscal 2019.
Valuation
The stock is trading at a price-to-earnings multiple of 10.2 times the fiscal 2019 consensus estimate, which is below its five-year historical average multiple of 10.8 times.
The average 12-month target price is $86.72, implying the stock has 14.3 per cent upside potential over the next year (including the dividend yield this equates to a potential total return of over 18 per cent). Individual target prices range from a low of $75 (from the analyst at Veritas Investment Research) to a high of $94 (from the analyst at TD Securities). Individual target prices are as follows in numerical order: $75, $80, $84, two at $85, $86, three at $88, $89, two at $90, $93, and $94.
Based on the consensus 12-month target prices, this bank stock has the highest potential price return (not including the dividend yield) compared to the other ‘Big Six’ banks. The forecast price returns for the major banks are as follows: 13.3 per cent for shares of CIBC (CM-T), 11.1 per cent for shares of TD Bank (TD-T), 10.6 per cent for shares of Royal Bank of Canada (RY-T), 9 per cent for shares of Bank of Montreal (BMO-T), and 6.4 per cent for shares of National Bank (NA-T).
Insider transaction activity
Earlier this month, two insiders accumulated shares in the public market.
On June 1, Aaron Regent, who sits on the board of directors, bought 13,000 shares at a price per share of $76.95, lifting his account balance to 32,377 shares.
That day, fellow board member Scott Thomson purchased 1,900 shares at a cost per share of $77.2458, increasing his portfolio’s position to 6,500 shares.
Chart watch
Year-to-date, the share price has declined 6 per cent. Month-to-date, the stock price has dropped 3 per cent driven lower by the recently announced bought deal financing.
Looking at key resistance and support levels, the share price has an initial ceiling of resistance around $80, near its 200-day moving average (at $80.06). There is major resistance around $85, near its record closing high of $84.87, set back in November 2017. Looking at the downside, there is technical support around $75, and failing that, there is support around $70.
The relative strength index (RSI) is at 31, suggesting the stock is nearing an oversold condition. Generally, a reading at or below 30 indicates an oversold condition.
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.