BMO also has strong footprints in the U.S. through its acquisitions of Harris Bank, Marshall & Ilsley and Mercantile Bancorp. BMO’s $700 billion in assets translates to a book value of $57.25 (fractionally above its current share price), which should help produce record share earnings in 2015 of $6.80. And going back 20 years — with the exception of the four-month period of November 2008 through February 2009 — this is the first time BMO has traded below its book value. For this and other reasons, Citigroup, Barclays and Standard & Poor’s have “buy” recommendations on the stock, with a target price between $76 and $82.
Detractors
However, there are others who strongly disagree. They note that the Canadian economy, with a 6.8 percent unemployment rate, is going through a significant and complex adjustment. The Canadian dollar crashed to 75 cents versus the U.S. dollar. The Canadian housing market appears to be on the cusp of a bubble, while prices for commodities — zinc, copper, nickel and lead — have fallen sharply. The prices for agricultural products such as wheat, corn, soybeans and hides have dropped significantly, reducing the increase of Canada’s gross domestic product to 1.2 percent in 2015 from 1.9 percent in 2014.
But Canada’s economic problem is mostly about oil. It’s hugely worse than the Street predicted in March, when crude plunged to $44 a barrel from $107 in June 2014. Now some oil bears tell us that with Iran back in the oil exporting game, oil could fall to $30 by early 2016. When the expenses of wages, drilling equipment, storage terminals, pipelines and moving oil, and shipping byproduct by rail, tankers or trucks exceed the cost, there’s going to be trouble in the oil patch. Therefore, though the consensus on BMO at Merrill Lynch, TD Securities and Thomson Reuters isn’t “sell” — which is a bad word in this industry — it’s “underperform,” just as it is with the Canadian economy.
But I still think BMO is a buy.
There have been seven Federal Reserve tightening cycles since 1982, and in six of the seven rises, the S&P 500 index was higher 12 months later. According to my research assistant, a retired 85-year-old certified public accountant with an eidetic memory, the S&P’s performance between the Fed’s first raise and the Fed’s most recent one has not been unimpressive. The S&P moved higher in those six cycles, and the average increase was 21 percent. Each of these cycles ranged from six months to 23 months. Of course, this was B.J., or “before Janet,” who won’t stop yapping about what she’ll do. Federal Reserve Chairwoman Janet Yellen will raise rates when she feels corporate revenue, earnings and dividend growth are strong enough to accept higher borrowing costs. Therefore, we shouldn’t be surprised if the S&P rises after the initial tightening, because it presages continued economic growth.
Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.
