Equitable Group (TSE:EQB), known for operating Equitable Bank (or EQB), is a top-notch Canadian bank stock, in our opinion, despite its recent fall. It features excellent fundamentals due to its capital-light business model, and it has a low valuation. Therefore, we are bullish on the stock.
What Makes EQB Attractive?
As an online-only bank, EQB doesn’t have to worry about the extra expenses associated with having physical locations, making it very profitable. Also, it offers fee-less banking and relatively high interest rates on savings, making it enticing for people to start banking with EQB since the big Canadian banks are less attractive in that sense. In fact, the company grew its customer base by 23% year-over-year in 2022 to 308,000 customers and expects deposit growth of 20% to 30% this year.
The company even has a solid growth track record regarding earnings, dividends (2.6% forward yield), and book value per share (BVPS). In 2022, its diluted earnings per share (EPS) grew by 9.4%, BVPS by 13.4%, and its dividend grew by 63.5%.
This year, the company expects EPS growth of about 10% to 15% growth. Meanwhile, BVPS is also forecast to grow by 12% to 15%, and dividend growth should range between 20% to 25%. Needless to say, it’s quite remarkable that Equitable Group expects better BVPS and EPS growth during 2023 compared to last year despite the market being in turmoil.
EQB Stock is Undervalued
To show that EQB stock is undervalued, we will use the excess returns model, which is more appropriate for financial companies because they tend to have volatile free cash flows.
As a result, trying to create forecasts for them doesn’t work well. The excess returns model allows us to use historical numbers instead, which are tangible. There are a few steps to follow for this valuation method.
First, you calculate a company’s excess return, meaning the spread between its return on equity (ROE) and its cost of equity; a higher ROE than the cost of equity is a good thing. Next, you calculate its terminal value. Add them up, and you get your valuation. Here’s the formula:
- Excess Return = (Average ROE – Cost of Equity) x Book Value Per Share
- Terminal Value = Excess Return / (Cost of Equity – Growth Rate)
- Fair Value = Book Value Per Share + Terminal Value
We will use the following assumptions for our calculations:
Average return on equity (ROE): 14.7% (five-year average)
Cost of equity: 13%
Book value per share: C$62.65
Growth rate: 2.94% (used 30-year Government of Canada bond yield as a proxy for long-term growth expectations)
Now that we have our assumptions, we’ll plug them into the formula highlighted above. The figures are in Canadian dollars:
- $1.065 = (0.147 – 0.13) x $62.65
- $10.58 = $1.065 / (0.13 – 0.0294)
- $73.23 = $62.65 + $10.58
Therefore, EQB stock is currently worth C$73.23 per this valuation method. Its current share price is C$54.52, making it undervalued.
Is EQB Stock a Buy, According to Analysts?
According to analysts, EQB stock comes in a Strong Buy based on 6 unanimous Buy ratings assigned in the past three months. The average EQB stock price target of C$89.66 implies 64.5% upside potential.
The Takeaway
EQB stock has pulled back recently as the recent financial crisis dragged down many financial stocks. However, EQB is not a U.S. regional bank, and it doesn’t look like it’s in trouble. What happens in the U.S. doesn’t really impact EQB. The company is profitable, undervalued, and is expected to keep growing. Also, analysts are unanimously bullish. All of this bodes well for EQB stock, making us bullish.
