Why Laurentian Bank of Canada Is up Over 1%

Laurentian Bank of Canada (TSX:LB), one of the largest financial institutions in eastern Canada, announced its third-quarter earnings results this morning, and its stock has responded by rising over 1% in early trading. Let’s break down the quarterly results and the fundamentals of its stock to determine if it could continue higher from here and if we should be long-term buyers today.

A very strong quarter of top- and bottom-line growth

Here’s a quick breakdown of 10 of the most notable financial statistics from Laurentian Bank’s three-month period ended on July 31, 2017, compared with the same period in 2016:

Metric Q3 2017 Q3 2016 Change
Net interest income $157.71 million $147.99 million 6.6%
Other income $90.30 million $81.09 million 11.4%
Total revenue $248.00 million $229.08 million 8.3%
Adjusted net income $59.91 million $46.07 million 30%
Adjusted diluted earnings per share (EPS) $1.63 $1.37 19%
Balance sheet assets $45,212 million $40,298 million 12.2%
Loans and acceptances $34,917 million $32,043 million 9.0%
Deposits $28,232 million $26,903 million 4.9%
Book value per share $50.54 $48.23 4.8%
Adjusted return on common shareholders’ equity 13.0% 11.4% 160 basis points

Should you buy in to the rally? 

It was a phenomenal quarter overall for Laurentian Bank, and it posted a fantastic performance in the first nine months of 2017, with its revenue up 7.3% to $728.44 million, its adjusted net income up 20.4% to $164.27 million, and its adjusted diluted EPS up 5.4% to $4.46. The results also crushed the consensus estimates of analysts, which called for adjusted diluted EPS of $1.49 on revenue of $246.78 million.

With all of this being said, I think the market has responded correctly by sending Laurentian Bank’s stock higher, and I think it still represents a great long-term investment opportunity for two fundamental reasons.

First, it’s still wildly undervalued. Laurentian Bank’s stock still trades at just 9.3 times fiscal 2017’s estimated EPS of $5.83 and only 8.7 times fiscal 2018’s estimated EPS of $6.25, both of which are very inexpensive compared with its five-year average price-to-earnings multiple of 11.7. These multiples are also inexpensive given its current earnings-growth rate and its estimated 6.3% long-term earnings-growth rate.

Second, it has one of the banking industry’s best dividends. Laurentian Bank pays a quarterly dividend of $0.62 per share, equal to $2.48 per share annually, which gives its stock a rich 4.55% yield. Investors must also note that its recent dividend hikes, including its 1.6% hike in May, have it positioned for 2017 to mark the 10th consecutive year in which it has raised its annual dividend payment, and it has a target dividend-payout range of 40-50% of its adjusted net income, so I think its consistently strong growth will allow this streak to continue for another decade at least.

With all of the information provided above in mind, I think Foolish investors should consider initiating long-term positions in Laurentian Bank today with the intention of adding to those positions on any significant pullback in the future.

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