It’s been a great year to own the Canadian banks, as they’ve all enjoyed very nice rallies back to new highs. Next year will also be a huge year for bank stocks, especially bank stocks with a large exposure to the U.S.
President-elect Donald Trump is determined to lower corporate taxes, and the U.S. Federal Reserve is also set on raising interest rates multiple times in 2017. The result will be a weakening loonie, and the banks with more exposure to the U.S. will heavily outperform those will minimal or no exposure to the U.S.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) had a decent year, but its most recent quarter was rather disappointing when compared to the results of its peers. The quarter was brought down by the results from the Canadian segment, but I believe the weakness is only temporary, as interest rates will rise over the long term because now they’re pretty much at the floor.
The strong point for the quarter was the U.S. banking segment of Toronto-Dominion Bank. The segment enjoyed a fantastic year-over-year increase of 14%. I believe the momentum will continue for its U.S. business, especially considering the fact that major tailwinds will propel it higher.
It’s also worth mentioning that the stock isn’t trading at a huge premium compared to its peers, as it has in the past. The stock is trading at a huge discount to intrinsic value right now especially considering a large number of tailwinds that the stock will have in the new year. We can expect the valuation gap between Toronto-Dominion Bank and its peers in the Big Five to widen as the company’s U.S. segment will really shine next year.
It’s a common misconception that Toronto-Dominion Bank is overvalued because its price-to-earnings multiple is always higher than its peers’. Toronto-Dominion Bank actually deserves a bigger premium right now given the impressive risk-management strategy and its fantastic U.S. banking segment.
The company also has a fantastic 17.3% ROE with an impressive history of both earnings growth and dividend growth. These are key metrics that are characteristics of any “Warren Buffett business.”
What about valuation?
Toronto-Dominion Bank stock is at all-time highs, and normally it’s not a value investment to buy a stock at this level. But this is a rare exception because of how well this company is positioned with its U.S. banking segment for the next few years.
The stock currently trades at a 14.13 price-to-earnings multiple with a 1.8 price-to-book multiple–both of which are in line with their historical average multiples; based on these values, the stock is fairly valued.
U.S. banking is going to have huge strength over the next few years as interest rates have only one direction to go, and that’s up. If you’re a deep-value investor, then you may want to consider adding a stake in this forever business to your portfolio.
