A quartet of Canadian companies were named to the inaugural “Best Stock Ideas” list for RBC’s Global Financials Research team.
The group consists of 11 senior analysts and 12 associates, covering global financial companies which include: Large Cap U.S. Banks, Mid-Cap U.S. Banks, U.S. Consumer Finance Companies, European and UK Banks, Canadian Banks; U.S., European and Canadian Insurance Companies; and Diversified U.S., European and Canadian Financial Companies. Collectively, they cover 185 companies.
The list is meant to highlight the best investment ideas within each Financials sector.
“Overall, on a secular basis we believe the period of easy money with zero percent or negative interest rates experienced from 2008-2020 is over,” they said. “However, on a cyclical basis over the next 12 months, with the exception of central banks in Europe, we expect the monetary tightening instituted by central banks will likely end followed by a period of monetary easing that will include a lowering of short-term interest rates. Additionally, we do not see a global recession, albeit economic growth is likely to be slow and certain markets may experience a quarter or two of negative real economic growth, in our view.”
Analyst Darko Mihelic named Bank of Montreal ( “outperform” and $134 target) as his top Canadian bank pick.
“We believe the Bank of the West (BoW) acquisition is transforming BMO’s U.S. footprint in an accretive manner for shareholders,” he said. “BMO expects the acquisition to be 7-PER-CENT accretive to EPS in 2024 and to achieve an incremental US$2 billion in run-rate pre-provision pre-tax earnings by the first half of 2026. BMO also now expects the BoW deal to achieve US$800 million in pre-tax cost synergies by Q2/24, up nearly 20 per cent from the bank’s original expectation of US$670 million. In our view, this acquisition differentiates BMO’s growth profile relative to its Canadian peers, particularly those that have not deployed capital inorganically.”
Mr. Mihelic also selected Sun Life Financial Inc. ( “outperform” and $76 target) for the insurance sector.
“As of Q3/23, SLF’s underlying ROE was 17.7 per cent, the highest ROE among the Canadian lifecos in the quarter,” he said. “SLF’s medium-term ROE target of 18 per cent-plus is also the highest among the Canadian lifecos. We assume an underlying ROE of 17.8 per cent in 2024 and 18.2 per cent in 2025. We also believe SLF’s earnings volatility over time will be lower than the peer average, justifying a higher valuation multiple versus peers.”
Analyst Geoffrey Kwan picked Element Fleet Management Corp. ( “outperform” and $30 target) from specialized finance firms.
“Significant Growth Opportunities: (1) EFN continues to win new clients and cross-sell existing clients additional vehicle fleet services; (2) substantial self-managed market opportunity that EFN estimates is $8-billion per year vs. EFN’s current annual revenues of $1.3-billion,” he said.” EFN’s value proposition is it believes it can save companies/governments 20 per cent vs. what they spend to manage their own fleets; and (3) we think EFN can deliver strong growth even during a recession as the OEM production shortage of past 2+ years left their clients with minimal vehicle replacements, causing a significant increase in fleet ownership costs, so clients are likely to have strong new vehicle demand even in a recession.”
Mr. Kwan added Brookfield Asset Management Ltd. (“outperform” and US$41 target) for asset managers and custody banks.
“BAM currently has no principal investments, making it one of, if not the most asset light, within BAM’s peer group. Even though BAM recently discussed making some principal investments (LP commitments to non-Flagship/nonOaktree funds; seeding new strategies), we still think BAM is likely to remain one of the most asset light vs. peers, which we think given BAM’s scale, strong investment track record, growth potential and attractive dividend yield should positively benefit its share price,” he said.