Canadian Imperial Bank of Commerce Stock Is A Hold (NYSE:CM)

Eli Unger/iStock Editorial via Getty Images

Let it never be said that I don’t invest in, or don’t like Canadian banks. I’ve invested in Scotiabank (BNS), Toronto-Dominion (TD), and at one point was invested in Bank of Montreal (BMO) as well as Royal Bank of Canada (RY).

To me, this sector is a very simple one. There is a point in the valuation for all of these banks where they become must-buys/must-owns. However, it’s not hard for these banks to reach valuations where they become “expensive” seen to their valuation and can result in no more than very average returns with 3-4% yields, as they crawl sideways or decline over time.

At least, this is what history shows us.

Let’s see what the Canadian Imperial Bank of Commerce (CM) has to offer investors today.

CIBC Logo

CIBC Logo

CIBC

Revisiting CIBC and its recent results

You can more or less count on that bank results during this time are going to be at the very least “stable”. This was also the case with recent CIBC results. I went through some of the bank’s fundamentals in recent articles, so for the time being, I’m going to focus on the more recent results – FY21.

They include improvements in EPS – massive ones of almost 49% YoY as the bank recovers from 2020 lows, with CET-1 improvements of around a quarter of a full percent. RoE is up, and Revenue was up by 7%.

CIBC saw beyond a full reversal for its 2019 numbers. The 2021 results are well beyond anything seen historically, with EPS in the double-digits even on a USD basis. The company hit every single one of its financial objectives.

CIBC Results FY2021

CIBC Results FY2021

CIBC

If we look at individual segments and branches, CIBC saw strengthening in most of its segments. This includes a slight market share gain in legacy personal banking, some record fund net flows, and double-digit growth in direct financial as well as growth in digital services. Commercial banking was up, wealth management saw gains as well.

At this point, if you follow results from financial companies, you’ll be used to decent results from them – especially when we consider things like fund flows, which are highly reliant on today’s positive (or at least it was) environment for companies such as this.

I’m therefore not surprised at the company’s excellent results for the year. I also think CIBC is doing a good job shoring up troubles ahead. The acquisition of the Canadian Costco portfolio (credit cards) is a good thing, as is the company’s ambition to become more efficient and focus on modernizing through cloud initiatives.

As an investor in a bank, I don’t care as much about ESG and the like – though I realize some at least do care about this.

CIBC Financial Highlights

CIBC Financial Highlights

CIBC

The outlook for CIBC is no different than any other bank or Canadian company in its situation. It includes good GDP growth in the mid-single-digits, which will drive growth, but with rising interest rates and inflationary pressures, the bank is likely to see some changing flow dynamics for its incomes. Fund flows and the like are not unlikely to begin reversing. Also, the unwinding/wind-down of the COVID-19 stimulus is also likely to start changing things.

The best thing CIBC and banks in its position can do is to keep their nose to the grindstone and keep working it. FY21 was an excellent year – but I don’t see FY22 being even remotely as good in terms of growth.

I don’t see a massive decline – I just don’t see the company offering a repeat performance with a 40%+ EPS growth YoY here. The combination of the aforementioned pressures, together with what we’ve already seen thus far in 2022 only confirms to me that 2022 is going to be a year where we have to fight hard for our market-beating types of returns.

The times of “easy incomes” through things like fund flow increases in a no-rate environment, they’re over.

Companies will have to prove themselves again – to a higher degree, and high/excessive valuations will likely be some of the first things that unwind.

Let’s look at the core of the issue – the valuation.

CIBC – The valuation

It’s not as much an “issue”, as it’s something to be aware of. It’s simple.

CIBC has a very well-established historical tendency for the past 15-or-so-years of trading around 10-10.5X P/E. This is not unique to CIBC, but a trend it shares with other of the Canadian “big five” banks.

That means, in layman’s terms, that anytime the company is below 10X P/E, it becomes a good, medium/long-term “BUY”. The lower it gets, the stronger that “BUY” becomes.

Conversely, if it goes the other way, the higher it goes, the more dangerous that holding becomes.

Look at this.

CIBC stock valuation

F.A.S.T graphs CIBC

F.A.S.T graphs

It’s almost as though you can see some pulling or pushing the stock price when it goes above or below certain levels. It’s never a straight line, but always a trend over time.

With that in mind, we’re now at 11.02x. It’s not the highest CIBC has been – but we’re starting to be at uncomfortable levels from where the company has usually dropped down. If you’re a long-term CIBC investor, you could certainly “let things ride” here. You’d go up and down, all the while making a 3-4% yield.

There are worse things.

But when a company shows us trends that are this clear, and when analyst accuracy is less than 80% with a 10% MoE, I move into action. If there are companies that I view as cheaper with more upside, there’s little downside to such a move, even if CIBC isn’t what I would call “excessively overvalued”.

I made some small amounts of money with CIBC in the COVID-19 crash, as well as a few years ago. My preference has often been for some of CIBC’s peers though, and at this price, I’m less keen than ever to invest in the bank.

I believe that following a superb 2021 for most banks, 2022 will not be a year seeing similar levels of growth. I believe in many cases, we’ll see declines – and the tighter a bank is tied to asset and wealth management as well as fund flows, the deeper that potential can go.

I don’t see you necessarily taking any major fundamental risk with CIBC. It’s one of Canada’s major banks. I view it as extremely unlikely that it will do anything to put your capital in any major sort of danger.

But this is not the same thing as delivering “alpha”, which is what I am looking for. I am after all, on Seeking Alpha, and I am literally seeking that alpha. From that respect, CIBC doesn’t have much to offer me over the next few years.

Even including 2023-2024 forecasts of 4-12% EPS growth, heavily end-loaded, the annualized RoR on a 10X P/E forecast is around 6% annually. That’s not horrible, but it certainly isn’t market-beating. Dividend increases are expected to come in at a modest 4-6% annually. But again, nothing forecasted will currently equal what we saw during 2021.

CIBC EPS forecast

CIBC EPS forecast

S&P Global, Tikr

Sure, there’s some slight forecasted increase in 2025-2026 – but remember how far forward we’re talking now. The closer periods of 2022-2024 are expected to be mostly flat, and I fully agree with this assessment. There are no major catalysts for further EPS growth the likes of which we saw last fiscal. Legacy efficiency improvements certainly won’t bring it about. Digital won’t. With fund flows reversing and tech being a more uncertain sector, inflation up, and rates rising, banks and similar institutions are like as not to become more dependent on classical rate NII-based products, as opposed to fee-based products.

This is not a bad thing, but it’s a different thing. It means lower income, but safer and more stable income – at least in theory.

When discounting for this, the resulting prospective growth becomes less than exciting in my view.

Current S&P Global forecasts consider CM no more than 3.8% undervalued to their average price target – and I wouldn’t even go that far, considering it to be around 7% overvalued to a price target of around $110/share.

That’s as high as I’ll go here. Anything beyond that, and I would be exposing myself to the risk of a valuation-related drawdown, which based on historical ranges, could go as high as 25%.

Thesis

My thesis for CIBC is:

  • A solid, fundamental Canadian bank with excellent upside at no more than $110/share, and preferably below this.
  • At the current price, it’s a very clear “HOLD” to me given the very real risk of a 15-20% downturn if the market turns and based on its historical valuation range.
  • Forecasts and guidance don’t give us much room for similar-level outperformance to 2021. Because of this, I remain cautious at this valuation and say “no”.
  • You could look at some of the cash-covered puts here, but the capital outlay is high, considering you’d make little more than a conservative 3% annualized yield on the June -22 $105 strikes, with more than $10,000 on the line.

I’ll wait for a better entry here.

Remember, I’m all about :

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

This process has allowed me to triple my net worth in less than 7 years – and that is all I intend to continue doing (even if I don’t expect the same rates of return for the next few years).

If you’re interested in significantly higher returns, then I’m probably not for you. If you’re interested in 10% yields, I’m not for you either.

If you however want to grow your money conservatively, safely, and harvest well-covered dividends while doing so, and your timeframe is 5-30 years, then I might be for you.

Canadian Imperial Bank of Commerce is a “HOLD” here.

Thank you for reading.

Be the first to comment

Leave a Reply

Your email address will not be published.


*