Canadian Western Bank updated December 16, 2018

The report for Canadian Western Bank is updated and rated (lower) Strong Buy at $26.10. CWB earned an ROE of 11.8% in its just completed fiscal 2018. It has not reported a loss in any quarter in over 28 years. And yet, due to fears and due to general market declines it is now trading at book value and 8.7 times trailing earnings.

Early this year the stock was as high as $40.83. At that time it was trading at 1.65 times book value and 15.8 times trailing earnings per share. The stock hit an all-time high of about $42 back in 2014 and traded at about 2.25 times book value and about 15.8 times trailing earnings.

The stock has plummeted, presumably due to perceived risks of loan losses, and/or recession and presumably due to higher interest rates and the cheaper prices of so many other available investments. Earnings and book value have continued to rise and the Bank itself remains optimistic about growth and continued low loan losses.

Over several decades now earnings and book value have risen. Sometimes faster and sometimes slower but basically fairly steadily. But the multiple in relation to book value has ranged from below 1.0 (I believe the low was 0.70) and above 2.0 several times as well as, of course, all points in between.

I did not expect this stock to return to trading at 1.0 times book value. Upon now reviewing the history I see it very briefly traded down as low as 0.7 times book value at the bottom of the Financial crisis in March 2009. But today’s situation in no way approaches the wide-spread gloom and dangers of that time. And it got down to about 0.9 times book value in February 2016 at a time when North American markets took a steep dive and Alberta was in recession due to lower oil prices and I believe CWB had reported someĀ loan losses related to loans to oil and gas production companies due to lower oil prices . It was also at about book value inĀ  the spring of 2017 when Home Capital was imploding due to high risk mortgages and CWB was thought to be affected due to its non-conventional mortgage business at its Optimum division. These excursions down to book value or below are scary as they happen (for those holding the shares) but tend to prove to be short-lived.

Until just a few months ago (when West Texas oil fell, and the price for Alberta oil plunged), Alberta appeared to be still growing out of the recession and the S&P 500 was still nicely positive for the year.

A buy and hold investor who has held CWB for many years has experienced very substantial volatility in both directions related to the valuation multiples. But ultimately the stock delivers a return based on its actual earnings growth plus dividend over the longer term. Those who buy at lower than the long-term average multiple will earn a somewhat higher return and the opposite is true as well. And it seems likely that the earnings and dividend will continue to grow over the years. The Bank notes that it has increased the dividend each and every year for the past 26 years.

At this time, the 1.0 price to book value, especially when combined with the 8.7 P/E ratio, looks like a strong buying opportunity. But that is never guaranteed since earnings could decline (despite management projecting growth) and since any further slide in the S&P 500 and Toronto index can tend to pull any stock down.

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