Investing in quality, undervalued stocks is a strategy popularized by investment moguls, including Warren Buffett and Benjamin Graham. Value investing is a process where you identify a portfolio of stocks that trade below their intrinsic value to benefit from outsized gains when market sentiment improves. One such cheap TSX bank stock is EQB (TSX: EQB), which should help you beat the broader markets in the upcoming decade. Let’s see why.
The bull case for EQB stock
Valued at $4 billion by market cap, EQB has returned 1,000% to shareholders since September 2004. However, cumulative returns are significantly higher at 1,490% if we account for dividend reinvestments.
EQB is a digital financial services company with over $125 billion in combined assets under management. It offers banking services through Equitable Bank, Canada’s seventh-largest bank by assets. EQB also operates through ACM Advisors, a majority-owned subsidiary specializing in alternative investments.
EQB has successfully leveraged technology to deliver services to more than 670,000 customers and six million credit union members. Despite a challenging macro environment, EQB increased its net interest income from $462.6 million in 2019 to more than $1 billion in fiscal 2023 (which ended in October).
Its net interest income rose to $271.4 million in the fiscal third quarter (Q3) of 2024, up from $240.8 million in the year-ago period. Total sales were up 15% year over year at $327 million, while adjusted pre-provision pre-tax income stood at $182 million. EQB’s return on equity stood at 15.9% and has averaged more than 16% in the past decade.
A steady expansion of its top line and widening profit margins have allowed EQB to increase annual dividends from $0.65 per share in 2019 to $1.88 per share in 2024, indicating a compound annual growth rate of almost 25%.
EQB stock is undervalued
Lower interest rates over the next 12 months will likely negatively impact EQB’s net interest income. However, it would also improve loan demand and reduce potential credit defaults, making EQB a top investment in September 2024.
EQB emphasized that its reserves for credit losses are appropriately reserved, with net allowances as a percentage of total loan assets of 26 basis points (bps) compared to 20 bps last year. Its adjusted provision for credit losses stood at $21.3 million, lower than $22.2 million in the April quarter, indicating an improving loan environment.
EQB’s growth in net interest income, loans under management, and higher non-interest revenue has allowed it to deliver sizeable returns to shareholders. Its non-interest income accounted for 17% of total sales and includes contributions from the higher-margin asset management business.
Analysts tracking EQB expect adjusted earnings to expand from $9.4 per share in fiscal 2023 to $12.4 per share in fiscal 2025. So, priced at 8.4 times forward earnings, EQB stock is cheap, given its earnings growth forecast and a dividend yield of almost 1.9%.
EQB’s growth story is far from over, as it ended fiscal Q3 with 485,000 retail customers, up 32% year over year. Moreover, its deposits rose 8% to $8.9 billion and are a key driver of direct-to-consumer funding. With customer transactions more than doubling in the last 12 months, EQB is strategically poised to gain market share from incumbents in the upcoming decade.
