National Bank of Canada Beats Q1 Estimates: Should You Buy Now?

National Bank of Canada (TSX:NA) beat first-quarter estimates this morning, and its stock has reacted by moving higher. Should you be a long-term buyer?

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The Motley Fool

National Bank of Canada (TSX:NA), the sixth-largest bank in Canada, announced better-than-expected first-quarter earnings results this morning, and its stock has responded by moving higher. Its stock still sits more than 23% below its 52-week high of $50.26 reached back in May 2015, so let’s take a closer look at the results and its fundamentals to determine if it could continue higher from here and if we should be long-term buyers.

A strong quarter of top- and bottom-line growth

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

Metric Q1 2016 Actual Q1 2016 Expected Q1 2015 Actual
Adjusted Earnings Per Diluted Share $1.17 $1.14 $1.14
Adjusted Revenues (TEB) $1.53 billion $1.47 billion $1.46 billion

Source: Financial Times

National Bank’s adjusted earnings per diluted share increased 2.6% and its adjusted revenues on a taxable equivalent basis increased 4.9% compared with the first quarter of fiscal 2015.

Its slight earnings-per-share growth can be attributed to its adjusted net income increasing 4.1% to $427 million, driven by growth in all three of its major segments, including 5.1% growth to $186 million in its Financial Markets segment, 7.6% growth to $184 million in its Personal and Commercial Banking segment, and 3.7% growth to $84 million in its Wealth Management segment.

Its strong revenue growth can be attributed to growth in all three of its major segments as well, including 4.6% growth to $724 million in its Personal and Commercial Banking segment, 7.9% growth to $451 million in its Financial Markets segment, and 3.5% growth to $358 million in its Wealth Management segment.

Here’s a quick breakdown of six other notable statistics from the report compared with the year-ago period:

  1. Net interest income increased 4.1% to $763 million
  2. Non-interest income increased 5.6% to $767 million
  3. Total assets increased 2.3% to $219.3 billion
  4. Total deposits increased 9.9% to $131.06 billion
  5. Total loans and acceptances increased 10.4% to $118.51 billion
  6. Book value per share increased 5.5% to $27.77

National Bank also announced that it will be maintaining its quarterly dividend of $0.54 per share, and the next payment will come on May 1 to shareholders of record at the close of business on March 28.

Should you add National Bank of Canada to your portfolio?

It was a solid quarter overall for National Bank, and the results surpassed expectations, so I think the market has responded correctly by sending its shares higher. I also think this could be the start of a sustained rally higher and that the stock represents a great long-term investment opportunity today for two primary reasons.

First, it’s wildly undervalued. National Bank’s stock trades at just 8.2 times fiscal 2016’s estimated earnings per share of $4.70 and only 7.8 times fiscal 2017’s estimated earnings per share of $4.95, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 10 and the industry average multiple of 12.8.

It also trades at a mere 1.39 times its book value per share of $27.77, which is a very inexpensive compared with its five-year average market-to-book value of 1.85.

With the multiples above and its estimated 7.1% long-term earnings growth rate in mind, I think National Bank’s stock could consistently trade at a fair price-to-earnings multiple of at least 10, which would place its shares upwards of $49 by the conclusion of fiscal 2017, representing upside of more than 26% from today’s levels.

Second, it has one of the best dividends in the banking industry. National Bank pays an annual dividend of $2.16 per share, which gives its stock a very high and safe yield of about 5.6%. It is also important to note that the company has raised its annual dividend payment for five consecutive years, and its recent increases, including its 3.8% hike in December 2015, has it on pace for 2016 to mark the sixth consecutive year with an increase.

With all of the information provided above in mind, I think Foolish investors should strongly consider beginning to scale in to long-term positions in National Bank of Canada today.

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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