Bank of Montreal (NYSE:) will report its third quarter 2021 earnings on Monday, August 23 before opening. BMO last beat consensus on EPS and beat revenue for the past three years.
The market has responded positively to the company's performance and the improving outlook for banks. BMO has a total YTD return of 38.6%, compared to 27.7% YTD for the iShares US Financials ETF (NYSE:) and 24.2% for the iShares Global Financials ETF (NYSE:). and consensus estimates for MET
Source: Investing.com
Even with the substantial price increase this year, MET seems cheaper than JPMorgan Chase (NYSE:), Bank of America (NYSE:), and Wells Fargo (NYSE:) based on forward P/E.
Citigroup (NYSE:) has a lower P/E than MET, but also a lower return.
Stock
Forward P/E
Forward dividend yield
Bank of Montreal (BMO)
10.8
3.3%
Citigroep (C)
9.2
2.8%
JPMorgan Chase (JPM)
12.5
2.3%
Bank of America (BAC)
13.9
2.0%
Wells Fargo (WFC)
14.2
1.6%
Forward P/E and forward dividend yield for BMO vs. major US banks (Morningstar.com)
The 5-year dividend growth rate for BMO is 5.6%. A simple representation of the Gordon growth model suggests that the expected return for BMO is 8.9% (5.6% dividend growth plus dividend yield). with the iShares US Financials ETF, but MET lags significantly for the 10-year period.
1-day
1-week
1-month
3-month
YTD
1 year
3-Year
5 years
10 years
15 years
MET
-0.28
2.20
2,46
5.62
38.64
80.59
12.46
12.79
8.30
6.46
IYF
0.27
0.83
3.61
5.24
27.73
46.48
13.87
15.55
15.49
5.19
IXG
0.35
1,74
4.32
2.63
24.20
46.00
9.74
29/12
10.42
2,77
Trailing total return (%) for MET vs. IYF and IXG. Periods longer than 1 year are calculated on an annual basis (Source: Morningstar)
To formulate a view on MET, I rely on two forms of consensus view. The first is the well-known consensus of Wall Street analysts. This provides a price target for 12 months based on earnings expectations. The second type of consensus that I consider is the market implied outlook, which is derived from the prices of options on BMO. The market price of an option represents the market consensus estimate of the probability that the price of a stock will fall above (call option) or below (put option) (the strike price) between now and the option's expiration.
By call and By analyzing put options with a range of strike prices and the same expiration date, it is possible to calculate the probability of all possible future returns for this period that will reconcile option prices. For those unfamiliar with market-implied outlook, I've written an overview post with examples and links to the relevant financial literature. implicit outlook captures traders' beliefs about the opportunities for profit and loss reflected in option prices. Wall Street Consensus on MET Wall Street Consensus on MET from 10 ranked analysts who issued ratings and price targets in the past 90 days. The consensus rating is bullish and the consensus price target for 12 months is $108.94, 6.7% above the current price.
There is a high degree of consistency among analysts, which is confidence in the predictive value of agreement. The lowest price target for 12 months is only 1.49% below the current price. In comparison, Seeking Alpha's Wall Street consensus outlook combines 14 analysts, the consensus assessment is bullish and the 12-month consensus price target is 7.5% above the current price.
Combined with the dividend yield of 3.3%, the expected 12-month total return from the consensus outlook is approximately 10%. This is generally in line with the Gordon growth model estimate using the 5-year dividend growth rate.
Market-Implied Outlook for MET
options on MET at a range of strike prices, all expiring on December 17, 2021, to assess the market-implied outlook for MET for the next 4 months (between today and the due date). I selected the December 2021 options to provide a year-end outlook.
The market implied outlook is expressed as a probability distribution of price return, with probability on the vertical axis and return on the horizontal .
Market-implied price return opportunities for MET, 4-M period
Source: Author's calculations using option quotes from eTrade next 4 months is highly symmetric, with very comparable opportunities for positive and negative returns of the same magnitude. For example, the 90th percentile for price return over the next 4 months is +11.8% and the 10th percentile is -12.6%.
The peak probability corresponds to a price return of 0.88% and the median is 0.0% . The annualized volatility derived from this breakdown is 21%, which is very low for individual stocks. In comparison, I calculated 30% annualized volatility for Citigroup in a just published post. the negative yield side of the distribution rotated about the vertical axis (see below). Market Implied Price Return Opportunities for MET for the 4-month period from today to December 17, 2021. The negative return side of the distribution is rotated on the vertical axis
Market Implied Price Return Opportunities for MET for a 4M period
Source: Author's calculations using option quotes from eTrade
The probabilities of positive and negative returns of the same magnitude are almost identical (the solid blue line is very close to the red dashed line). This market-implied outlook is somewhat bullish. The market-implied outlook for dividend-paying stocks generally has a higher probability of negative returns compared to positive returns, because the dividend payments reduce a stock's potential upside. For dividend payers, a symmetric market implied outlook is bullish. In addition, investors are somewhat risk averse and pay more than fair value for put options that protect their disadvantage. A neutral market implied outlook is expected to have slightly increased opportunities for negative returns to reflect this. Given these two factors, having such a symmetrical market implied outlook (blue line almost on top of the dotted red line) is moderately bullish. have gained nearly 40% for the YTD due to strong gains and the improving outlook for banks. At the current price, the stock still looks fairly cheap and the 3.3% dividend yield is high compared to major US banks. The Wall Street consensus is bullish, with prices expected to rise about 7% over 12 months, for a total expected return of about 10%. It's worth remembering that BMO has also outperformed expectations in recent quarters. stake. The market implied outlook for MET is also moderately optimistic. BMO has low expected volatility and quite low upside potential. For investors seeking exposure to lower volatility financials, while still generating income, BMO is worth considering.
