First Cut Stock Study Report

Transcription

1 First Cut Stock Study Report Company Name: Royal Bank of Canada Ticker: RY.TO Date of Study: 8/28/2015 Price: $ Your Name: address: Mike Higgins higginsm@dnaco.net City: Vandalia State: OH Chapter Name (if applicable): Editor s Note OKI Tri-State RY.TO trades on the Toronto stock exchange and all price data is presented in this First Cut is in Canadian dollars (CAD). The Royal Bank of Canada also trades in the United States in US dollars (USD) on the NYSE under the ticker RY. Due to exchange rate fluctuations the stock prices for RY.TO and RY are quite different. The closing price on 8/27/15 (used in this study) for RY.TO was C$73.99 (Canadian) and was $56.04 (USD) for RY. The exchange rate at that time was C$1.324 (Canadian) for 1 USD. Be sure to understand these currency differences before investing in this stock. Discuss why you consider this to be a high quality, growth company that should be investigated further. Please include comments on historical sales and EPS growth, pre-tax profit margin, return on equity, and debt. Note: This analysis was done in Canadian currency (C$). I did so because all of the data on the Royal Bank of Canada from Value Line, Morningstar, and the SSG data feeds used this currency. While this will not affect the Sales Growth estimates, the EPS Growth estimates, or the Up/Down Ratios, it will impact the High Price, Low Price and the Buy/Hold/Sell Price Ranges. You will need to convert these from Canadian to US currency (today is C$ Canadian to $1 US) if you are buying Royal Bank of Canada stock on the NYSE under the ticker RY. The Banking sector was heavily penalized during the Great Recession. US bank growth may be hampered due to resulting regulatory burdens. Non-US banks may have a competitive advantage and Canadian banks could be an attractive alternative. Accordingly, I used the Value Line screener to look at the Banking Industry (359 banks), I then limited the list to banks with a safety rating of 1 (Highest). This resulted in a list of 4 banks (Bank of Nova Scotia, Cullen Frost Bankers Inc, Canadian Imperial Bank of Commerce and Royal Bank of Canada). Since

2 RBC had the highest ranks for Timeliness (2 Above average), Earnings Predictability (90), and Price Growth Persistence (65), I decided to focus on this bank. Quoting from Value Line, "Royal Bank of Canada is the largest bank in Canada measured by assets and market capitalization, The company presently has more than 16 million clients in Canada and 39 other countries". It continues to expand in the US via it's pending acquisition of City National Corporation. Oil and gas industry loans are focus area but represent a small overall portion of RBC's loan portfolio. Briefly describe how the company makes money: Taking in money at low interest rates and lend it out at high ones. Does so in 5 business areas: Personal & Commercial Banking, Capital markets, Wealth management, Insurance, Investor & Treasury Services. Projected growth rate for sales: 7.5% Why did you select this rate? Discuss from where future growth will come. Value Line estimate of income in time frame (sum of net interest income and non interest income) is for C$48,955 which translates to a 7.5% growth rate. Future growth rate could come from acquisitions (City National Corporation in 4Q 2015 is most recent example) Projected growth rate for earnings per share: 7.1% Why did you select this rate? Used the preferred procedure with the inputs concisting of: Projected 5 year sales 7.5% Less Expenses 35.9% (average from last 5 years) Less Taxes 28.5% (from Value Line) Less Preferred Dividends (continued from last year) Divided by Current diluted Shares Outstanding 1460 (from Value Line) EPS by Revenue Estimate C$8.45 or 7.1% Projected High P/E: 13.1 Deleted 2010 High and Low PE as outliers. Remaining 4 years resulted in a 13.1 Average High PE Projected Low P/E: 10.0 Same rationale as Projected High P/E Projected Low Price: C$62.00

3 I set the low price at 10% below the 52 week low. At the current price, the stock is a (check one): Buy or Hold or Sell At the current price, the upside-downside ratio is: 3.1 to 1 Compound Annual Return Using Forecast High P/E: 12.1% Your final recommendation (check one): Buy or Hold or Sell Explain: Looks like the current price for RY.TO (in Canadian currency, remember) is just in the BUY range. The stock could be of interest to an income investor (dividend yield at 4%, with a 4 year dividend growth rate of 9%) but with a Compound Annual Yield of 12.1%, it falls short of meeting the BI objective of doubling your money in 5 years (which requires 14.9%). At the same time, the safety, earnings predictability and price growth persistence ratings are a definite plus. If today, you buy Royal Bank of Canada stock on the NYSE under the ticker RY, remember to convert from Canadian to US currency. Today s BUY range in US currency would be approximately $47 to $56 (C$62/ to C$74.2/ ).

4 Stock Selection Guide Company Royal Bank Of Canada Date 8/27/2015 Prepared by HIGGINS Data taken from BI Stock Data Where traded TSE Industry Banks - Global Capitalization --- Outstanding Amounts Reference Preferred ($M) 4,650.0 % Insiders % Institution Diluted Shares (M) 1, Debt ($M) 7,795.0 % to Tot Cap 12.1 % Pot Dil VISUAL ANALYSIS of Sales, Earnings, and Price Symbol: RY.TO FY2015 QuarterEnding (04/15) Sales ($M) Earnings Per Share Latest Quarter Year Ago Quarter Percentage Change 8, , % % (1) Historical Sales Growth 6.0% (3) Historical Earnings Per Share Growth 7.9% (2) Estimated Future Sales Growth 7.5% (4) Estimated Future Earnings Per Share Growth 7.1%

5 2 EVALUATING Management 5 5-YEAR POTENTIAL This combines price appreciation with dividend yield to get an estimate of total return. It provides a standard for comparing income and growth stocks. A Present Full Year's Dividend $ Present Price of Stock B AVERAGE YIELD - USING FORECAST HIGH P/E Avg. % Payout 48.7 % 3.7 % Forecast High PE C COMPOUND ANNUAL RETURN - USING FORECAST HIGH P/E Annualized Appreciation Average Yield Annualized Rate of Return 8.4 % 3.7 % 12.1 % % Present Yield AVERAGE YIELD - USING FORECAST AVERAGE P/E Avg. % Payout 48.7 % 4.2 % Forecast Average PE COMPOUND ANNUAL RETURN - USING FORECAST AVG P/E Annualized Appreciation Average Yield Annualized Rate of Return Royal Bank Of Canada Last 5 Year Avg. Pre-tax Profit on Sales 24.4% 29.9% 31.3% 27.8% 22.4% 24.6% 36.2% 40.7% 38.8% 39.3% 35.9% % Earned on Equity 17.6% 21.9% 23.9% 16.1% 11.8% 14.6% 17.3% 18.2% 18.7% 18.4% 17.5% % Debt To Capital 32.5% 35.6% 29.1% 30.6% 56.4% 57.8% 55.5% 52.2% 13.3% 13.0% 38.4% 3 PRICE-EARNINGS HISTORY as an indicator of the future This shows how stock prices have fluctuated with earnings and dividends. It is building block for translating earnings into future stock prices. PRESENT PRICE 74.0 HIGH THIS YEAR LOW THIS YEAR A B C D E F G H Year Price Earnings Price Earnings Ratio Dividend % Payout % High Yield High Low Per Share High A / C Low B / C Per Share F / C * 100 F / B * AVERAGE CURRENT/TTM AVERAGE PRICE EARNINGS RATIO 11.5 CURRENT PRICE EARNINGS RATIO 11.4 EVALUATING RISK and REWARD over the next 5 years Assuming one recession and one business boom every 5 years, calculations are made of how high and how low the stock might sell. The upside-downside ratio is the key to evaluating risk and reward. A HIGH PRICE - NEXT 5 YEARS Avg. High P/E X Estimate High Earnings/Share 8.45 Forecasted High Price $ B LOW PRICE - NEXT 5 YEARS (a) Avg. Low P/E (b) Avg. Low Price of Last 5 Years (c) Recent Market Low Price (d) Price Dividend Will Support 9.90 X Estimate Low Earnings/Share 6.00 Forecasted Low Price $ Present Dividend High Yield Selected Forecasted Low Price $ 62.0 C ZONING using 25%-50%-25% Forecasted High Price Minus Forecasted Low Price Range. 25% of Range 12.2 Buy Zone Hold Zone Sell Zone % 62.0 to to to Present Market Price of is in the Buy Zone D UPSIDE DOWNSIDE RATIO (POTENTIAL GAIN VS. RISK OR LOSS) High Price Minus Present Price Present Price Minus Low Price To 1 E PRICE TARGET (Note: This shows the potential market price appreciation over the next five years in simple interest terms.) High Price Present Market Price X % Appreciation % 4.2 % 9.8 %