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Bank of Montreal: Buy the Post-Earnings Dip?

Bank of Montreal (TSX:BMO)(NYSE:BMO) reported a solid Q3 2017 earnings report on August 29, 2017, but the general public was not impressed with the performance of Harris Bank, and shares of BMO took a 2.55% plunge in the trading session following the release of its earnings.

Solid third-quarter results from the Canadian business

Net income was clocked in at $1.38 billion for the quarter, an increase of 11% from the same quarter last year. The quarterly total revenue was $5.46 million, down 3.1% from the same quarter last year.

The Canadian business was solid with $614 million worth of profit for the quarter, up 9% year over year. The wealth management division delivered $264 million in profit, which was a whopping 32% increase compared to the same quarter last year. Those are quite impressive Canadian results, so why did BMO shares tank following the earnings release?

Underwhelming U.S. results

The U.S. personal and commercial banking business and its underwhelming results can be thanked for the post-earnings dip. Harris Bank, BMO’s U.S.-based business, was pretty flat with profits of just $278 million.

I believe the post-earnings sell-off was warranted, but not because the U.S. business showed flat year-over-year growth. While the U.S. results were nothing to write home about, I think the real reason why BMO nosedived was because shares were too expensive relative to its peers to begin with, and the general public’s expectations may have grown to be a bit too much in the short term.

BMO has a solid presence in the U.S. and the management team is continuously finding ways to beef up its U.S. business. The terrific U.S. exposure is one the reasons why BMO has been quite expensive relative to its peers, but U.S. exposure isn’t unique to BMO, as many other Big Five banks also have solid U.S. businesses and/or U.S. expansion plans.

Shares are now more reasonably valued

While the short-term results for BMO’s U.S. business were nothing to get excited about, I believe long-term investors should start to put BMO on their watch lists as shares appear to be dropping back into value territory again. The U.S. business is well positioned to ride major long-term tailwinds, so just because one or two quarters disappoint doesn’t mean you should be discarding your shares.

Shares currently trade at a 11.33 price-to-earnings multiple and a 1.4 price-to-book multiple, both of which are in line with the company’s five-year historical average multiples of 11.4 and 1.5, respectively.

With shares at more attractive valuations, it’d be a wise move to be a buyer today.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.


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