Bank of Montreal’s Adjusted Q1 EPS Climbs 14.4%: Should You Be a Buyer?

Bank of Montreal (TSX:BMO)(NYSE:BMO), the fourth-largest bank in Canada and the eighth-largest bank in North America in terms of total assets, announced better-than-expected first-quarter earnings results on the morning of February 23, but its stock responded by making a slight move lower in the day’s trading session.

Let’s take a closer look at the results and the fundamentals of its stock to determine if this weakness represents a long-term buying opportunity or a warning sign.

Beating the expectations with ease

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

Metric Q1 2016 Actual Q1 2016 Expected Q1 2015 Actual
Adjusted Earnings Per Share $1.75 $1.72 $1.53
Adjusted Revenue $5.16 billion $4.92 billion $5.06 billion

Source: Financial Times  

Bank of Montreal’s adjusted earnings per share increased 14.4% and its revenue increased 2.1% compared with the first quarter of fiscal 2015.

The company’s very strong earnings-per-share growth can be attributed to its adjusted net income increasing 13.2% to $1.18 billion, driven by 5.2% growth to $530 million in its Canadian Personal & Commercial Banking segment, 28.8% growth to $264 million in its U.S. Personal & Commercial Banking segment, and 18.2% growth to $260 million in its BMO Capital Markets segment.

Its slight revenue growth can be attributed to its net interest income increasing 14.5% to $2.48 billion, driven by 5.8% growth to $1.25 billion in its Canadian Personal & Commercial Banking segment, 28.6% growth to $877 million in its U.S. Personal & Commercial Banking segment, and 10.6% growth to $429 million in its BMO Capital Markets segment.

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

  1. Revenue, net of insurance claims, commissions, and changes in policy benefit liabilities, increased 11.3% to $4.79 billion
  2. Total assets increased 4% to $699.29 billion
  3. Total deposits increased 9.6% to $470.84 billion
  4. Total net loans increased 12.5% to $345 billion
  5. Total common shareholders’ equity increased 11.7% to $41.59 billion
  6. Book value per share increased 12.5% to $59.61

Bank of Montreal also announced that it will be maintaining its quarterly dividend of $0.84 per share, and the next payment will come on May 26 to shareholders of record at the close of business on May 2. 

Should you buy or avoid Bank of Montreal’s stock today?

The first quarter was a great success for Bank of Montreal, and its results beat analysts’ expectations, so I think the slight drop in its stock was simply a result of weakness in the overall market. With this being said, I think the stock represents a very attractive long-term investment opportunity today for two reasons in particular.

First, it’s undervalued. Bank of Montreal’s stock now trades at just 10.3 times fiscal 2016’s estimated earnings per share of $7.14 and only 9.7 times fiscal 2017’s estimated earnings per share of $7.55, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 11.4 and the industry average multiple of 12.8. It also trades at a mere 1.23 times its book value per share of $59.61, which is very inexpensive compared with its five-year average market-to-book value of 1.53.

Second, it has a great dividend. Bank of Montreal pays an annual dividend of $3.36 per share, which gives its stock a high and safe yield of about 4.6%. Investors must also note that the company has raised its annual dividend payment for four consecutive years, and its recent increases, including its 2.4% hike in December 2015, has it on pace for 2016 to mark the fifth consecutive year with an increase.

With all of the information provided above in mind, I think Foolish investors should strongly consider using the weakness in Bank of Montreal’s stock to begin scaling in to long-term positions.

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

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