It’s a fire sale! After the poor performance of Canada’s financial sector last quarter, there are plenty of bargains to be had. As such, it is the perfect time to take a look at Canada’s Big Five banks, the most reliable in the industry.
Interestingly, all five are now trading below historical price-to-earnings (P/E) averages. Over the past 20 years, this has been a reliable buy signal. Every time the banks dip below their P/E averages, they always revert to the mean. At this point, I would be comfortable investing in any of the Big Five. If you are looking for the cheapest, however, that distinction belongs to Bank of Nova Scotia (TSX:BNS)(NYSE:BNS).
BNS stock performance
In 2018, Bank of Nova Scotia limped to the finish line with a 16.49% loss. This was a close second to the worst-performing bank in Canada, Canadian Imperial Bank of Commerce. Looking further out, however, Bank of Nova Scotia shareholders have trailed the pack. Over the past two years, its share price has lost 12% and its five-year return of 5.96% is by far the lowest of the group. Its five-year compound annual growth rate is only 1.2%. In comparison, CIBC, which has a five-year CAGR of 3.2%. Canada’s best-performing bank, Toronto-Dominion Bank, has a CAGR of 7.9%.
The company’s stock price isn’t keeping up with its historical growth rate. It has grown earnings by a CAGR of almost 6% over the past five years, and revenue has grown at an annual pace of approximately 7.3%.
Bank of Nova Scotia is trading below its five-year price-to-book, price-to-sales, and price-to-free-cash flow multiples. Likewise, its current P/E of 9.70 is well below its historical average of 12.1 times earnings. A return to the mean would imply a share price of $82.52 — 21% upside from today’s price of $68.27. Analysts are expecting the company to record earnings of $7.46 in 2019. As such, it is not out of the question that Bank of Nova Scotia could be trading around $90 in one-year’s time.
The company’s Graham Number, a measure of intrinsic value, is $89.08 per share, and analysts have a one-year price target of $84.17 on the stock. Both point to upside of +20% over its current share price.
Best bank for growth?
Bank of Nova Scotia is on pace for 8% revenue growth in 2019. This is tops among the Big Five. It is expected to top the group once again in 2020 with 6.20% revenue growth. This is not surprising, as the company has been on a significant acquisition spree. In 2018, it made just shy of $7 billion in acquisitions. It has been the most active player in the industry.
Earnings-per-share growth is expected to be approximately 7% over the next couple of years. This places it second behind Toronto-Dominion for the highest EPS growth rates.
Bank of Nova Scotia has been a dog as of late. However, recent acquisitions and its status as one of the best valued banks have it well positioned to outperform in 2019.