No one who looks at the price action in Bank of Montreal (TSX: BMO) would claim that bank stocks are boring. Despite a slight bounce on Friday, the stock has dropped more than 20% in just seven trading days and is down 40% from its 52-week high. I am not a stock analyst (not that it is a huge shortcoming because most analysts chopped their “price targets” after BMO fell sharply) and it is very much possible that BMO has more mines waiting to go off in the Capital Markets division.
Still, it is hard not to feel that BMO is a huge bargain at these prices, as the biggest problem seems to be the fear of the unknown. Nobody seems to have a clue about how bad things could get, so investors are imagining nightmare scenarios like a cut in the dividend or issuing equity. The Bank’s poor disclosure record isn’t helping matters.
Assuming BMO’s problems are manageable and the bank can consistently hit cash earnings of $5, the stock is trading at just 8.6 times and sports a dividend yield of 6.5%. The high dividend yield and low expectations should provide a floor on the stock and the stock could have some immediate upside if it can resolve its credit issues.
Disclosure: I own shares in BMO and this post is not a recommendation to buy or sell. Do your own due diligence.
Bookmark: del.icio.us Digg StumbleUpon
13 responses so far ↓
1 MillionDollarJourney // Mar 10, 2008 at 7:40 am
I agree, BMO could be a huge bargain here. I think the biggest fear that investors have with BMO is that there is a potential of a dividend cut.
2 moneygardener // Mar 10, 2008 at 8:28 am
The dividend is attractive but the dividend growth potential and earnings growth potential in the short to mid term is my concern. One must be careful not to buy based on yield. This strategy can lead to the acquisition of value traps. I’m not sure what type of yield premium BMO should demand over banks with better prospects such as TD, BNS, and RY. Buying the cheapest, highest yielding bank has historically been a great strategy, but I’m always a believer that when something seems to good to be true, it usuallys is.
3 Eric // Mar 10, 2008 at 8:50 am
BMO is definitely on the radar, but I’m still to nervous of what’s left in the closet to hit the buy button. I’m keeping an eye on them and if they can show clean books in the next quarter I’ll likely take them up on thier low price.
4 FourPillars // Mar 10, 2008 at 9:20 am
I think it’s a buy. Even if they cut their div in half - the price is still not bad.
Eric - if they show a clean balance sheet next quarter then it won’t be on sale anymore…
5 charles // Mar 10, 2008 at 10:04 am
The market is pricing in more markdowns and the possibility of of a dividend cut. Certainly doubt there will be a dividend increase.
If there is further substantial markdowns or other averse news and they do cut the dividend. The shares would fall further. There’s also the stigma of previous gaffes by BMO before event the subprime mess. It smells value trap to me.
Even if there weren’t new BMO news, the trend is still going south for the time being. I’d wait until the second quarter for things to settle more in the credit financing. Thus getting a better bargain.
Four Pillars: That’s the thing, it’s taking somewhat a risk to buy before news is released but then you are compensated for it right now.
6 Canadian Capitalist // Mar 10, 2008 at 11:08 am
BMO is certainly not a growth story. I was looking at the Annual Report the other day and revenue growth was less than 1% over five years and 3% (I think) over 10 years. So, BMO is definitely not a growth story. That said, even no-growth stories can be great buys at the right price. Assuming BMO can clean up its mess and hit $5 in earnings implies a double-digit earnings yield. Over 5 to 10 years, that’s not a bad investment even if P/E doesn’t improve from here. If P/E multiple expands, that’s an additional bonus.
7 Aleks // Mar 10, 2008 at 2:44 pm
I’m too wary of the continuing bond meltdown to buy financial stocks right now. There’s a lot further to go in the US and the real estate correction hasn’t even started in Canada. Even if BMO isn’t directly holding any mortgage-backed ABCP they’re probably holding debt from companies who do. There’s still way too much bad debt out there that hasn’t been re-priced yet.
To my mind, the idea of “decoupling” is not just wrong, it’s actually backwards. Financial markets are more interdependent than ever. And the bleeding in the US is far from over.
8 ThickenMyWallet // Mar 10, 2008 at 3:43 pm
I am a huge bank stock fan and I agree with Aleks- its too early to get in.
BMO’s position of refusing to do an equity raise to prop up their balance sheet also strikes me as stubborn and misguided. I suspect they may have to reverse this position as they try to get out of this mess.
The large business problem is that BMO’s retail operations are lagging behind RY, TD and BNS. It can’t even open new bank accounts properly which greatly concerns me as its peers are beginning to distance itself from it.
9 Canadian Capitalist // Mar 10, 2008 at 6:26 pm
Aleks, TMW: Too true. I feel it is a bargain at this level but there is something to be said for not catching falling knives.
10 Phil S // Mar 10, 2008 at 8:37 pm
If you are talking about BMO’s retail banking service, I am a BMO customer and I have a personal banking representative assigned to me. She is very professional and does everything in a timely fashion and looks into any problems I run into and everything is good. I have absolutely no problems or major complaints using BMO as a retail customer.
I am also a BMO shareholder and I am obviously disappointed at their most recent quarter - I am down a huge % on this stock right now. They market themselves from top to bottom throughout their Canadian Retail Banking organization as being a risk averse business. Then suddenly someone in the BMO capital markets division gets caught on the wrong side of a huge bet on the price of natural gas? And then they get this immense writedown on their own commercial paper? And they also may get caught holding the bag in the Montreal accord?
You are all right that their Canadian Retail Banking division is very good, but you can’t separate that one entity from the business as a whole as it is just one piece of the puzzle. I am afraid that BMO Capital Markets may be full of cockroaches waiting to bust out. And who knows what sort of exposure that BMO Harris Bank has in the sub-prime mortgage mess brewing in the USA? If they broke up the company, then I agree, I would be buying up their Canadian Retail Banking division’s shares like crazy, but unfortunately it just doesn’t work that way…
11 JBubba // Mar 11, 2008 at 11:49 am
Remember too that the last 6 years has seen massive bank profits from M&A debt funding, one of the largest credit bubbles of the last century and innovative securitisation products that banks won’t be able to sell for a very long time after the recent bloodbath in the debt markets. There are many who believe that banks will revert to the mean of low profit/margin traditional banking with much less profit than seen in the last decade. Just my $0.02.
12 charles // Mar 11, 2008 at 12:34 pm
Is it a surprise that all the banks are up today but bmo is down following the news of central banks liquidity infusion. To be honest I couldn’t find why in the news excerpts pertaining aside from BMO being tainted by the market.
The 6.1% yield is clouding that they still have subprime exposure that still hasn’t been declared and possibly will move onto their balance sheets further impacting their earnings. BMO is being singled out for a reason, unless I knew something that the market didn’t I wouldn’t bet against it for now.
13 Canadian Capitalist // Mar 11, 2008 at 5:00 pm
charles: It is definitely not encouraging that BMO was down on a day most other banks were up sharply. My understanding is that the bulk of BMO’s troubles relate to the fact that the credit markets have seized up (BMO says it has minimal sub-prime exposure) and it cannot rollover the ABCP it sponsors. Your point that it may pay to wait and see how the dust settles is a good one.
Leave a Comment