TD Stock Study (3-30-23)

I recently did a stock study on Toronto-Dominion Bank (TD) with a closing price of $59.22 (NYSE).

Value Line writes:

     > Toronto-Dominion Bank, one of Canada’s biggest by assets, has
     > branches in Canada, the U.S., and other countries. It serves
     > over 27 million customers worldwide in four key units: Canadian
     > Personal and Commercial Banking including TD Canada Trust and
     > TD Auto Finance Canada; U.S. Retail including TD Bank and TD
     > Wealth (U.S.); Wealth Management and Insurance including TD
     > Wealth (Canada) and TD Direct Investing; and Wholesale Banking.

This large-sized company has grown sales and EPS at annualized rates of 6% and 14.8%, respectively, over the last decade. Lines are generally up, straight, and parallel except for a sales dip in ’21. PTPM has closely tracked peer and industry averages generally trending higher from 28% in ’13 to 44.6% in ’22 with a last-5-year average of 36.2%.

Over the last 10 years, ROE has been higher than peer and industry averages going from 7.2% in ’13 to 24.6% in ’22 with a last-5-year average of 20%. Debt-to-Capital over the decade has been greater than peer and industry averages with a last-5-year average of 75.1%. While uncomfortably high, perhaps, Value Line gives an A rating for Financial Strength while M* gives an Exemplary rating for Capital Allocation (along with a Wide economic moat rating).

Return on Average Assets has a last-5-year average of 0.84%. An outstanding number to look for is 1.5% or more over several years. If I remember correctly from a Ross Meredith presentation, though, ROAA isn’t as relevant for large banks (versus smaller regional/community banks) because business segments are diversified rather than dominated by loans.

I forecast long-term annualized sales growth of 5% based on the following:

• CNN Business projects 9.3% YOY and 10.4% per year for ’23 and ’22-’24, respectively (based on 2 analysts).
• YF projects YOY 10.2% and 12% for ’23 and ’24, respectively (4 analysts).
• Zacks projects YOY 7.5% contraction and 12.3% growth for ’23 and ’24, respectively (3).
• Value Line projects 4.3% annualized growth [total assets] from ’22-’26.
• CFRA projects 6.4% YOY growth and 7.5% growth per year for ’23 and ’22-’24, respectively.
• M* offers a 2-year ACE of 10.9% annualized growth.

Without any long-term estimates (Value Line separates loans from total assets but not report “sales” or “revenue”), I am forecasting to the low side.

I forecast long-term annualized EPS growth of 6% based on the following:

• CNN Business projects 4.2% YOY and 9% per year for ’23 and ’22-’24, respectively (based on 2 analysts), along with 5-year annualized growth of 9.1%.
• MarketWatch projects 14.3% YOY and 18% per year for ’23 and ’22-’24, respectively (6 analysts).
• Nasdaq.com projects 8.9% YOY growth for ’24 (5).
• Seeking Alpha projects 4-year annualized growth of 9.1%.
• YF projects YOY 3.8% and 8% for ’23 and ’24, respectively (13), along with 5-year annualized growth of 6.7%.
• Zacks projects YOY 2.2% and 8.9% for ’23 and ’24, respectively (5), along with 5-year annualized growth of 8%.
• Value Line projects 8.8% annualized growth from ’22-’26.
• CFRA projects 7.9% YOY and 6.3% per year for ’23 and ’22-’24, respectively, along with a 3-year projected CAGR of 6%.

I am forecasting below the range [mean of five long-term estimates: 8.3%].

My Forecast High P/E is 9. Over the last 10 years, high P/E has declined from 26.8 in ’13 to 9.1 in ’22 with a last-5-year average of 10. I am forecasting below the range.

My Forecast Low P/E is 5.5. Over the last 10 years, low P/E has ranged from 22.1 in ’13 to 5.2 in ’20 with a last-5-year average of 6.7. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast is the default value of $45.40. This is 23.3% less than the previous closing price, 18.1% less than the 52-week low, and 2.9% greater than the ’21 low.

Excluding 93.8% in ’13 (upside outlier), Payout Ratio has ranged from 37.6% in ’22 to 48.4% in ’20 over the last 10 years. The last-5-year average is 43.3%. I am forecasting just below the range at 37%.

These inputs land TD in the HOLD zone with an U/D ratio of 2.9. The Total Annualized Return (TAR) is 15%.

PAR (using Forecast Average—not High—P/E) is 11.3%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I will use TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 32 studies done in the past 90 days (16 studies with outliers and my own study excluded), averages for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.9%, 6.2%, 10.2, 7.2, and 43.9%. I am lower across the board. MS high and low EPS are $12.15 and $7.66 compared to my $11.05 and $8.26. My low EPS may be greater than MS due the latest quarterly earnings release, and my high EPS may be less due to a [marginally] lower forecast growth rate. MS has a Low Stock Price Forecast of $48.60, which is 7% higher than mine (not surprising since the stock has fallen recently). Once again, this does not align with the default value of 7.2 * $7.66 = $55.15. I think some studies manually override the Low Stock Price Forecast rather than lowering the Forecast Low P/E when the latter would allow for a clearer translation inside the numbers. Value Line forecasts an average annual P/E of 10.5 compared to MS 8.7 and my 7.3.

A robust MOS underlies this study, and I would be a buyer under $58/share.