CM

Should We Avoid Canadian Imperial Bank of Commerce (CM) Because of Its Low Analyst Ratings?


With an average analyst rating of hold, Canadian Imperial Bank of Commerce is clearly not a favorite. But some of the best stock picks are contrarian in nature. With most analysts more focused on growth than on value, a mediocre analyst rating does not necessarily mean a stock is a bad investment. So what do we know about CM's valuation?

Over the last year, Canadian Imperial Bank of Commerce shares have moved -23.8% while trading between the prices of $39.4 and $56.68. This represents a -25.0% difference compared to the S&P 500, which moved 1.4% over the last 52 weeks.

At its current price of $41.63 per share, CM has a trailing price to earnings (P/E) ratio of 11.2 based on its 12 month trailing earnings per share of $3.72. Considering its future earnings estimates of $5.06 per share, the stock's forward P/E ratio is 8.2. In comparison, the average P/E ratio of the Finance sector is 14.34 and the average P/E ratio of the S&P 500 is 15.97.

Canadian Imperial Bank of Commerce's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. We can solve this problem by dividing the trailing P/E ratio by the company's five year earnings growth estimate, which in this case gives us a 16.13 Price to Earnings Growth (PEG) ratio.

A PEG ratio between 0 and 1 indicates a potentially undervalued stock. This metric is useful because some companies have a low P/E ratio for a reason: there is no earnings growth potential in the stock. Other companies may have high P/E ratios, but may still be undervalued if they have very high expected earnings growth rates. The main caveat with the PEG ratio is that it relies on the company's earnings growth estimates, which are potentially subject to manipulation.

We can also compare the ratio of Canadian Imperial Bank of Commerce's price to its book value. A company's book value refers to its present equity value: what is left when we subtract its liabilities from its assets. CM has a book value of 0.81, with anything close or below one indicating a potentially undervalued company.

The final element of our analysis will touch on Canadian Imperial Bank of Commerce's capacity to generate cash for the benefit of its shareholders or for reinvesting in the business. For this, we look at the company's levered free cash flow, which is the sum of all incoming and outgoing cash flows, including the servicing of current debt and liabilities. Canadian Imperial Bank of Commerce has a free cash flow of $21.61 Billion, which it uses to pay its shareholders a 8.1% dividend.

By most metrics, Canadian Imperial Bank of Commerce is an undervalued stock. So why are analysts giving it a low rating? It probably has to do with their perception of its limited growth potential, as represented by its elevated PEG ratio. For growth-oriented investors, CM is cheap for a reason. On the other hand, diehard value investors believe that if you wait long enough an undervalued stock will always reach a fair valuation. We will continue to monitor the stock to see which thesis prevails.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

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