Is National Bank of Canada a Strong Buy Following its Q1 Earnings Beat?

National Bank of Canada’s (TSX: NA) stock rose over 3% following the release of its first-quarter earnings. Should you buy into the rally?

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National Bank of Canada (TSX: NA), the seventh largest bank in Canada in terms of total assets, announced first-quarter earnings before the market opened on February 25, and its stock responded by rising over 3% in the trading session that followed. Let’s take a thorough look at the quarterly results to determine if we should consider buying into the rally, or if we should wait for it to subside.

Breaking down the results

Here’s a summary of National Bank’s first-quarter earnings compared to what analysts had expected and its results in the same period a year ago.

Metric Reported Expected Year-Ago
Earnings Per Share $1.14 $1.12 $1.09
Revenue $1.46 billion $1.44 billion $1.37 billion

Source: Financial Times

National Bank’s adjusted earnings per share increased 4.6% and its revenue increased 6.5% compared to the first quarter of fiscal 2014. The company’s solid earnings per share growth can be attributed to adjusted net income increasing 6.8% to $410 million, led by 22.8% growth to $178 million in its Financial Markets segment, and 9.2% growth to $83 million in its Wealth Management segment.

Its strong revenue growth can be attributed to revenues rising in all three of its major segments, including 5% growth to $691 million in its Personal & Commercial Banking segment, 14.5% growth to $418 million in its Financial Markets segment, and 6.5% growth to $345 million in its Wealth Management segment.

Here’s a quick breakdown of 10 other highly important statistics and ratios from the report compared to the year-ago period:

  1. Total assets increased 4.4% to $214.47 billion
  2. Total deposits decreased 0.5% to $119.24 billion
  3. Total loans and acceptances increased 1.1% to $107.32 billion
  4. Total assets under administration increased 12.4% to $312.7 billion
  5. Non-interest income increased 4% to $735 million
  6. Net interest income increased 9.2% to $724 million
  7. Net interest margin contracted five basis points to 2.2% in the Personal & Commercial Banking segment
  8. Adjusted efficiency ratio contracted 20 basis points to 58.7%
  9. Adjusted return on common shareholders’ equity contracted 130 basis points to 17.5%
  10. Book value per share increased 11.2% to $26.33.

National Bank also announced that it would be maintaining its quarterly dividend of $0.50 per share. The next payment will come on May 1 to shareholders of record at the close of business on March 30.

Should you be a long-term buyer of National Bank?

National Bank of Canada is the seventh largest bank in Canada. Increased demand for its products and services led it to a better-than-expected fourth-quarter performance, and its stock responded accordingly by rising over 3%.

I think National Bank’s stock represents a great long-term investment opportunity, even after the 3% rally, because it still trades at low valuations and pays a bountiful dividend.

First, National Bank’s stock trades are at very inexpensive valuations, including just 10.5 times analysts’ estimated earnings per share of $4.62 for fiscal 2015, only 9.9 times analysts’ estimated earnings per share of $ 4.91 for fiscal 2016, and a mere 1.8 times its book value per share of $26.33.

Second, National Bank pays an annual dividend of $2.00 per share, which gives its stock a yield of approximately 4.1% at current levels. I think this makes it qualify as both a value and dividend investment opportunity today.

I think National Bank of Canada represents one of the best investment opportunities in Canada’s financial industry today. Foolish investors should take a closer look and consider initiating long-term positions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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