Standing out among the Street's worst performers today is Toronto-Dominion Bank, a commercial banking company whose shares slumped -3.4% to a price of $57.44, 11.52% below its average analyst target price of $64.92.
The average analyst rating for the stock is buy. TD lagged the S&P 500 index by -4.0% so far today and by -32.5% over the last year, returning 1.1%.
The Toronto-Dominion Bank, together with its subsidiaries, provides various financial products and services in Canada, the United States, and internationally. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.
Toronto-Dominion Bank's trailing 12 month P/E ratio is 18.2, based on its trailing EPS of $3.16. The company has a forward P/E ratio of 9.6 according to its forward EPS of $5.99 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the finance sector has an average P/E ratio of 20.04, and the average for the S&P 500 is 29.3.
To better understand TD’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Toronto-Dominion Bank’s PEG is 4.1, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Toronto-Dominion Bank's free cash flow, which was $-9926000000 as of its most recent annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $40.71 Billion and they've been growing at an average rate of -40.7%. TD's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 6.8% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Toronto-dominion bank's P/B ratio of 0.94 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Finance sector was 1.86 as of the third quarter of 2024.
Toronto-Dominion Bank is likely overvalued at today's prices because it has a Very low P/E ratio, an exceptionally low P/B ratio., and positive cash flows with a downwards trend. The stock has poor growth indicators because of its negative net margins with a negative growth trend, and a negative PEG ratio. We hope this preliminary analysis will encourage you to do your own research into TD's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
