Canadian Western Bank Stock: Buy, Hold, or Sell After Buyout Offer?

Canadian Western Bank stock is, at best, a “hold” as both stocks of CWB and NA appear to be fairly valued.

| More on:

Canadian Western Bank (TSX:CWB) jumped as high as $44 (or almost 77%) on June 12 after the surprising news that National Bank of Canada (TSX:NA) was acquiring the regional bank. Based on the buyout offer, CWB shareholders would get 0.45 shares of National Bank. If you did the math at the time, it equated to $51.78 per share for CWB shareholders for the $5 billion acquisition.

CWB’s stock price was $43.18 at market close yesterday. Why doesn’t the Canadian bank stock trade in the $50 range?

Canadian Western Bank: A value stock before the incredible jump

First, let’s talk about the big jump from the June 11th market close price of $24.89. Based on CWB stock’s long-term normal valuation, it could trade at a price-to-earnings (P/E) ratio of about 10.6 to 12.4, which equated to a fair price of about $37 to $44 per share that investors could have used as a price target.

So, it was a nice value stock before the big jump. However, investors needed to have high conviction because the stock has traded largely between $22 and $27 per share (P/E of seven to eight) since June 2022, whereas it could be worth approximately $40 per share. It required a catalyst to reach the fair price range. And it just so happens that the National Bank buyout news performed the magic.

Why doesn’t CWB stock trade in the $50 range?

As mentioned earlier, if the deal goes through, CWB shareholders would get 0.45 shares of National Bank. Stock prices change and are impacted by news, such as macro news or company-specific news, including earnings releases. For example, since June 11, National Bank stock has declined about 7%.

NA Chart

NA stock price movement since June 11, 2024 Data by YCharts

Typically, in a merger, the stock falls for the acquirer. And since this is an all-stock deal, the changing NA stock price adds a layer of uncertainty. Who knows where NA stock will trade when the transaction closes? At $108.40 at writing, 0.45 shares translate to $48.78 per share for CWB shareholders.

Forget about $50, then. Why doesn’t CWB trade at $48-49 today? There’s uncertainty in the deal.

First, the transaction must be approved by CWB shareholders (two-thirds of the votes must say “yes”) in a meeting expected to occur in September 2024.

Second, it requires regulatory approvals. If regulators reject the deal, National Bank might need to pay CWB a “reverse termination fee equivalent to 4% of the CWB equity value” (which is just over $166 million based on the recent market capitalization), as noted in the press release.

Third, if all goes well, the transaction is expected to close by the end of 2025. Let’s say that happened in December 2025, which would be roughly a 1.5-year wait. This is a pretty long wait, and a lot can happen in between. Other than the reasons mentioned above, there could be a black swan event or other macro news that could impact the stock market or the NA stock price.

Fourth, the time value of money suggests that a dollar today is worth more than a dollar tomorrow. So, as time elapses and we get closer to the transaction close period, the CWB stock price should get ever closer to 0.45 of the NA stock price.

Should investors buy, hold, or sell CWB shares? All said and done, CWB is fairly priced today with a dividend yield of 3.2%. It pays a safe and growing quarterly dividend. If the deal didn’t go through, its valuation stayed at today’s levels, and its earnings remain resilient and growing, it could trade in the $48 in a couple of years, leading to total returns of about 7% per year. This is but one of the scenarios that could happen.

NA is also fairly priced today and could deliver annualized returns of about 9% per year over the next few years. Based on the press release, it “has identified $270 million of pre-tax annual cost and funding synergies, with upside from revenue opportunities.”

Depending on investors’ comfort with the uncertainties, CWB stock could be a “hold” or “sell” at current levels.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Bank Stocks

man touches brain to show a good idea
Bank Stocks

2 No-Brainer TSX Bank Stocks to Buy With $200 Right Now

Here are two top Canadian bank stocks long-term investors may certainly want to consider for growth and dividend income over…

Read more »

chart reflected in eyeglass lenses
Bank Stocks

Is Royal Bank of Canada Stock a Buy for its 3.3% Dividend Yield?

RBC stock has done incredibly well this year and recently bumped up its dividend. But is this enough for investors?

Read more »

Man data analyze
Bank Stocks

Canadian Bank Stocks: Buy, Sell, or Hold?

Going into 2025, the Canadian banks might still have a rough road ahead. But which one might offer the smoothest…

Read more »

man touches brain to show a good idea
Bank Stocks

CIBC Vs. Royal Bank Stock: Where Should You Park Your Investment Capital?

When it comes to choosing between two strong banks, Canadian Imperial Bank of Commerce (TSX:CM) and Royal Bank of Canada…

Read more »

An investor uses a tablet
Bank Stocks

Where Will TD Stock Be in 5 Years?

Despite ongoing challenges, TD Bank’s strong financial base and focus on growth initiatives could help its stock touch new heights…

Read more »

four people hold happy emoji masks
Bank Stocks

Is BNS Stock a Buy, Sell, or Hold for 2025?

Bank of Nova Scotia is up more than 20% in 2024. Are more gains on the way?

Read more »

Hourglass and stock price chart
Stocks for Beginners

This Bank Stock Could Be the Best Investment of the Decade

TD stock may look problematic now, but long-term investors should see this as an opportunity to lock in a strong…

Read more »

sale discount best price
Bank Stocks

It’s Time to Buy: 1 Canadian Stock That Hasn’t Been This Cheap in Years

TD stock may be going through rough waters, but it's likely to see the other side, making now a great…

Read more »