CIBC Is Setting Up To Be A Great Buy

| About: Canadian Imperial (CM)

Summary

Fantastic Q1 2016 earnings report could be a catalyst for a sustained rally.

Large oil and Canadian housing exposure will be a tailwind once the Canadian economy rebounds.

CIBC has a strong dividend that will continue to increase.

CIBC (NYSE:CM) has had a great start to 2016, as the stock rallied almost 20% on rising oil prices, and slight improvement in the Canadian economy. CIBC is a very high quality stock with a great risk management strategy, and the stock still trades at a discount to intrinsic value. Although the bank does have high exposure to the energy and housing sectors, which have generated huge fear in investors, I believe that the reasons for the fear over the exposure is overblown, and may actually be a catalyst that drives the stock higher, as the Canadian economy recovers from the horrific recession it had in 2015. Many pundits, including the big five banks of Canada think that the TSX will outperform the U.S. markets in 2016. If you're an American income investor, then this may be the perfect play to capitalize on both FX rates, and a recovering Canadian economy.

Fantastic Q1 2016 earnings report could be a catalyst for a sustained rally

CIBC reported a terrific Q1 2016 earnings, and I still believe there is room for the stock to move up. Despite the Canadian economy recovering from a brutal downturn, CIBC managed to report $1 billion in earnings, or an EPS of $2.55, up 8% year-over-year. CIBC also topped revenue by 6%, and RoE by 19% YoY. The incredibly impressive numbers can be attributed to the retail banking segment, which when combined with the business banking segment caused huge growth for the bank. Adjusted net income for these two segments rose 12% YoY. CIBC's wealth management division fell 7.5%, as net income dropped 7% in this segment. This was expected considering the horrific economic environment that Canada was in for the 2015 and the beginning of 2016. It was a great quarter, and I believe CIBC will report even better numbers in Q2, as oil has jumped a huge amount over the last quarter.

Large oil and Canadian housing exposure will be a tailwind once the Canadian economy rebounds

CIBC has the biggest exposure to the energy and housing sectors, both of which are scaring many investors away from this company. I believe the fears over oil and housing are way overdone. CIBC reported $18.7 billion of energy exposure, but it is important to note that nearly 75% of these loans are investment grade, and not junk. Many pundits are saying that oil will rebound this year, and I see CIBC benefiting from this rally the most out of any Canadian bank considering its huge exposure. If you're bullish on oil, and want a huge dividend payer, then look no further than CIBC. There is also the possibility that oil starts tanking again, in which case CIBC may see its rally run out of steam, as it comes back down to the $90 level seen at the beginning of the year.

As for housing loans, CIBC saw $166 billion in mortgages in its loan portfolio as of Q1 2016. It is important to note that over 60% of these loans are insured against a housing collapse. The loan-to-value ratio is also at 59%, which is not bad, but a huge 40% of housing loans are uninsured. This means CIBC will have a huge amount of financial liability once a housing correction does happen. Although the Canadian housing market has gotten frothy over the past few years, I do not believe a major correction is in the works, with the exception of Vancouver and Toronto. If a Canadian housing correction does in fact happen this year, CIBC could face some major trouble, as it did in 2008. It is important to note that CIBC has still not recovered to its high of $106 it had before the 2008 housing meltdown. This is because of its high dependence on the Canadian housing market. If you're a bear on Canadian housing, then I'd go for another bank stock that has less exposure in this industry, such as TD Bank (NYSE:TD), which has the lowest exposure to housing.

Strong dividend that will continue to increase

CIBC pays $4.60 per share annually, which currently yields 4.5%. The bank has increased its annual dividend for five straight years, and pays out around 50% of its net earnings. Any growth seen in CIBC's banking business will go straight to rewarding shareholders with its bountiful yield. After the rally in the stock, I believe that CIBC is fair valued at current levels given the amount of risk brought on by the huge exposure to the oil and housing sectors. If you're bullish on these industries, then CIBC may actually be a bargain at current levels, but if you're a bear on oil or the housing market, then you're better off looking at another bank, as CIBC may be hit very hard if oil plummets again, or if a housing correction occurs. Personally, I'd wait until CIBC offers a considerable margin of safety with a 5% yield before initiating a position on this stock. At those levels, you can safely tuck this investment away, and collect the huge dividend for many years to come.

Disclosure: I am/we are long TD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.