Multiple TP Adjustments -G&M A series of equity analysts on the Street raised their target prices for shares of Bank of Montreal (
) following Tuesday’s release of
better-than-anticipated first-quarter results.
Before the bell on Tuesday, BMO reported higher first-quarter profit helped by strong retail banking revenue in Canada and the U.S. and a busy quarter for capital markets. Excluding one-time gains from hedging strategies related to its pending acquisition of California-based Bank of the West as well as the sale of its European asset management business, it earned $3.89 per share, exceeding the Street’s forecast of $3.26.
Citing a receding financing risk and “best-in-class” results, Scotia Capital’s Meny Grauman upgraded BMO shares to “sector outperform” from “sector perform” with a $169 target, up $165. The average on the Street is $165.10.
“We downgraded BMO shares to Sector Perform on the back of its announced acquisition of San Francisco-based Bank of the West (BoW) for $21-billion on December 20,” said Mr. Grauman. “At the time, we acknowledged that the deal had some notable strategic attributes that outweighed its weaknesses, and also had very compelling financial metrics. Yet we were concerned about uncertainty surrounding the ultimate size of the equity raise that BMO would need to finance the transaction, and believed that this would be a headwind for the shares in the short run. That in fact is what happened, as the shares have trailed the peer group since rumors of a deal first made headlines. Yet that performance gap has narrowed since the acquisition was announced, and narrowed even further on the back of another peer-leading set of quarterly results. We believe that this gap is likely to continue to close, especially relative to TD which this week announced a large US acquisition of its own. While BMO is still projecting that it will need to raise $2.7-billion in the open market, we increasingly believe that this figure is unlikely to get larger, and in fact could be quite a bit lower if Fed approval takes longer than the end of calendar 2022.”
Elsewhere, RBC Dominion Securities’ Darko Mihelic called it a “strong start” to 2022 and sees it making “the road to closing its acquisition [of Bank of the West] an easier ride.”
“Revenue and PTPPE growth in Canada P&C, U.S. P&C, and Capital Markets were solid and better than the peers that have reported,” he said. “While some elements of Q1 may not repeat (e.g., trading), we believe BMO will continue to have solid PTPPE growth for the remainder of 2022, possibly enough to cause the ultimate equity issue for the Bank of the West acquisition to come in under plan.
“We continue to view BMO’s valuation as attractive and we believe its earnings power gets stronger after the BoW deal closes.”
Raising his earnings and revenue projections through fiscal 2023, Mr. Mihelic increased his target for BMO shares to $164 from $160 with an “outperform” rating.
“On a forward P/E basis, BMO is trading at 9.3 times our 2023 core EPS estimate, the lowest multiple among peers and 9 per cent below its historical average premium to peers,” he said. “On a P/B basis, BMO is trading at 1.73 times, below the peer average of 1.87 times.”
Other analysts making changes include:
* Desjardins Securities’ Doug Young to $161 from $157 with a “buy” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were above our forecast, which was partially due to strong capital markets results, but its Canadian and US P&C banking operations also handily beat our forecasts. Commercial loan growth was strong, with further upside potential. And, its non-interest expense (NIX) ratio was better than anticipated. We increased our estimates,” said Mr. Young.
* Canaccord Genuity’s Scott Chan to $171 from $169 with a “buy” rating.
“We increase our F22E/F23 adj. EPS forecast by 3 per cent/2 per cent, respectively,” said Mr. Chan. “This primarily reflects higher revenue (NII, Other Income), partially offset by larger NIX and removal of its NCIB program this FY. We suggest that BMO’s implied equity raise (at announcement was $2.7B) to help fund the Bank of the West (BOW) transaction could track lower (e.g. solid internal capital generation), although timing of a raise is still uncertain.”
* Stifel’s Mike Rizvanovic to $172 from $170 with a “buy” rating.
“BMO reported a strong Q1, in our view, beyond just an outsized Capital Markets result, with both the Canadian and U.S. P&C Banking segments exceeding our forecasts on solid loan volumes and a surprising sequential increase in margins, while benign credit conditions allowed for a further release of performing-loan PCLs, with more releases likely on the way over the next several quarters,” he said. “Our EPS estimates move up modestly coming out of Q1 (up 1 per cent for F2023) to reflect broad-based strength across BMO’s operating segments and a partial offset from a weaker earnings trajectory for Wealth.”
“We continue to view the bank as being undervalued relative to its peers, which we believe provides a favorable entry point for investors.”
* CIBC World Markets’ Paul Holden to $160 from $158 with a “neutral” rating.
BANK OF MONTREAL
144.67+37.27 (34.70%)