National Bank of Canada (TSX:NA), Canada’s sixth-largest bank, 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 we should consider buying in to this rally or wait for it to subside.
A very strong quarterly performance
Here’s a quick breakdown of 10 of the most notable financial statistics from National 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 excluding specific items | $886 million | $833 million | 6.4% |
| Non-interest income excluding specific items | $857 million | $777 million | 10.3% |
| Total revenues on a taxable equivalent basis and excluding specific items | $1,743 million | $1,610 million | 8.3% |
| Net income excluding specific items | $524 | $486 million | 7.8% |
| Diluted earnings per share (EPS) excluding specific items | $1.39 | $1.33 | 4.5% |
| Total assets | $240.07 billion | $229.90 billion | 4.4% |
| Total deposits | $152.31 billion | $141.04 billion | 8% |
| Total loans and acceptances | $133.17 billion | $124.79 billion | 6.7% |
| Book value per share | $30.84 | $28.39 | 8.6% |
| Return on common shareholders’ equity excluding specific items | 18.4% | 19.0% | (60 basis points) |
What should you do now?
It was a great quarter overall for National Bank, and it posted a phenomenal performance in the first nine months of fiscal 2017, with its adjusted revenue up 9.8% to $5.1 billion, its adjusted net income up 32% to $1.52 billion, and its adjusted diluted EPS up 30.2% to $4.05. The second-quarter results also beat the consensus estimates of analysts polled by Thomson Reuters, which called for adjusted revenue of $1.65 billion and adjusted EPS of $1.32.
With all of this being said, I think the +1% pop in National Bank’s stock is warranted, and I think it still represents a great investment opportunity for long-term investors for two fundamental reasons.
First, it’s still undervalued. National Bank’s stock still trades at just 10.6 times fiscal 2017’s estimated adjusted EPS of $5.31 and only 10.1 times fiscal 2018’s estimated adjusted EPS of $5.57, both of which are inexpensive given its current earnings-growth rate and its estimated 10.4% long-term earnings-growth rate.
Second, it has a great dividend. National Bank currently pays a quarterly dividend of $0.58 per share, equal to $2.32 per share annually, which gives it a generous 4.1% yield. It’s also important to note that its recent dividend hikes, including its 3.6% hike in May, have it on track for 2017 to mark the seventh 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 earnings, so I think its very strong growth will allow this streak to continue for another seven years at least.
With all of the information provided above in mind, I think Foolish investors should consider initiating long-term positions in National Bank today with the intention of adding to those positions on any significant pullback in the near future.
