Feature Industry Review

The Best Companies of the Financial Services Industry – May 2015

 

A Glimpse at the Financial Services Industry (1)While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the banking industry, selecting the five most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 500 companies reviewed by ModernGraham, 27 were identified as being closely related to the financial services industry.  Of those, only three are suitable for the Defensive Investor, nine are suitable for the Enterprising Investor, and the remaining fifteen are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 127.8% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 25.87.  The industry as a whole, therefore would appear to be overvalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as the most undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

SLM Corporation (SLM)

Sallie_Mae_logo_2009SLM Corporation passes the initial requirements of the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor has issues with the company’s inconsistent dividend history, and the lack of earnings stability or sufficient growth over the last ten years. The Enterprising Investor has no initial concerns. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $0.48 in 2011 to an estimated $1.26 for 2015. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of an annual earnings loss of 0.14% over the next 7-10 years. The ModernGraham valuation model returns an estimate of intrinsic value falling above the current price, indicating that the company is undervalued at the present time.  (See the full valuation)

Lincoln National Corporation (LNC)

LfglogoLincoln National Corporation passes the initial requirements of the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor is concerned by the company’s lack of earnings stability over the last ten years. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $0.80 in 2011 to an estimated $5.01 for 2015. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for annual earnings growth of 1.59% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has been astronomical, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that the company is undervalued at the present time.  (See the full valuation)

Capital One Financial Corporation (COF)

500px-Capital_One_Financial_logo.svgCapital One Financial qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings stability or growth over the last ten years, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $3.20 in 2010 to $6.93 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.35% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)

Ameriprise Financial Inc. (AMP)

220px-Ameriprise_LogoAmeriprise passes the initial requirements of the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor is concerned by the company’s lack of earnings stability over the last ten years. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $3.42 in 2011 to an estimated $7.54 for 2015. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for annual earnings growth of 4.22% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has been astronomical, averaging nearly 25% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that the company is undervalued at the present time.  (See the full valuation)

BlackRock Inc. (BLK)

220px-BlackRock_wordmark.svgBlackRock Inc. passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only initial concern is the high PEmg ratio, and the Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $7.56 in 2010 to $16.03 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 7.35% annually over the next 7-10 years. In fact, the historical growth is around 22.37% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation)

The Full List

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Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
AMP Ameriprise Financial, Inc. E 5/14/2015 $290.14 $128.27 44.21% 17.01 2.09%
AXP American Express Company E 4/30/2015 $132.71 $81.25 61.22% 16.28 1.28%
BEN Franklin Resources, Inc. D 2/27/2015 $83.77 $51.52 61.50% 15.06 1.16%
BK The Bank of New York Mellon Corporation E 4/15/2015 $54.37 $43.47 79.95% 22.41 1.56%
BLK BlackRock, Inc. D 4/27/2015 $617.00 $368.08 59.66% 22.96 2.37%
CBG CBRE Group Inc S 1/24/2015 $44.33 $38.29 86.37% 33.30 N/A
CME CME Group Inc S 10/6/2014 $32.76 $93.98 286.87% 29.93 2.13%
COF Capital One Financial Corp. E 1/24/2015 $266.63 $85.02 31.89% 12.27 1.88%
DNB Dun & Bradstreet Corp S 7/5/2014 $102.22 $128.97 126.17% 19.75 1.43%
EFX Equifax Inc. S 4/4/2015 $43.53 $100.27 230.35% 38.86 1.16%
ETFC E TRADE Financial Corporation S 1/26/2015 $15.25 $29.50 193.44% 73.75 N/A
FIS Fidelity National Information Services S 5/11/2015 $83.77 $64.37 76.84% 27.28 1.62%
GS Goldman Sachs Group Inc S 11/10/2014 $71.04 $207.80 292.51% 14.84 1.25%
HRB H & R Block Inc S 2/17/2015 $44.54 $32.09 72.05% 21.25 2.49%
ICE Intercontinentalexchange Group Inc S 5/9/2015 $186.80 $236.87 126.80% 29.57 1.27%
IVZ Invesco Ltd. S 7/15/2014 $58.55 $40.52 69.21% 21.44 2.67%
LM Legg Mason Inc E 2/7/2015 $39.86 $53.77 134.90% 51.70 1.49%
LNC Lincoln National Corporation E 5/13/2015 $193.01 $58.61 30.37% 11.70 1.36%
LUK Leucadia National Corp. S 5/19/2015 $0.00 $24.92 N/A 71.20 1.00%
MCO Moody’s Corporation D 3/14/2015 $110.08 $110.11 100.03% 30.76 1.24%
MS Morgan Stanley S 2/2/2015 $10.58 $38.17 360.78% 22.59 1.57%
NDAQ NASDAQ OMX Group, Inc. S 3/27/2015 $34.13 $52.62 154.18% 23.70 1.90%
NTRS Northern Trust Corporation S 8/31/2014 $22.45 $75.56 336.57% 25.19 1.91%
SCHW Charles Schwab Corp S 3/29/2015 $4.90 $31.41 641.02% 40.27 0.76%
SLM SLM Corp E 5/6/2015 $48.56 $10.41 21.44% 8.26 N/A
TROW T. Rowe Price Group, Inc. E 3/15/2015 $124.01 $81.57 65.78% 21.52 2.55%
V Visa Inc E 5/22/2015 $75.87 $69.62 91.76% 35.34 0.69%

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To view the MG Value and PEmg information,  you must be logged in as a premium member.  Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
AMP Ameriprise Financial, Inc. E 5/14/2015 $128.27 2.09%
AXP American Express Company E 4/30/2015 $81.25 1.28%
BEN Franklin Resources, Inc. D 2/27/2015 $51.52 1.16%
BK The Bank of New York Mellon Corporation E 4/15/2015 $43.47 1.56%
BLK BlackRock, Inc. D 4/27/2015 $368.08 2.37%
CBG CBRE Group Inc S 1/24/2015 $38.29 N/A
CME CME Group Inc S 10/6/2014 $93.98 2.13%
COF Capital One Financial Corp. E 1/24/2015 $85.02 1.88%
DNB Dun & Bradstreet Corp S 7/5/2014 $128.97 1.43%
EFX Equifax Inc. S 4/4/2015 $100.27 1.16%
ETFC E TRADE Financial Corporation S 1/26/2015 $29.50 N/A
FIS Fidelity National Information Services S 5/11/2015 $64.37 1.62%
GS Goldman Sachs Group Inc S 11/10/2014 $207.80 1.25%
HRB H & R Block Inc S 2/17/2015 $32.09 2.49%
ICE Intercontinentalexchange Group Inc S 5/9/2015 $236.87 1.27%
IVZ Invesco Ltd. S 7/15/2014 $40.52 2.67%
LM Legg Mason Inc E 2/7/2015 $53.77 1.49%
LNC Lincoln National Corporation E 5/13/2015 $58.61 1.36%
LUK Leucadia National Corp. S 5/19/2015 $24.92 1.00%
MCO Moody’s Corporation D 3/14/2015 $110.11 1.24%
MS Morgan Stanley S 2/2/2015 $38.17 1.57%
NDAQ NASDAQ OMX Group, Inc. S 3/27/2015 $52.62 1.90%
NTRS Northern Trust Corporation S 8/31/2014 $75.56 1.91%
SCHW Charles Schwab Corp S 3/29/2015 $31.41 0.76%
SLM SLM Corp E 5/6/2015 $10.41 N/A
TROW T. Rowe Price Group, Inc. E 3/15/2015 $81.57 2.55%
V Visa Inc E 5/22/2015 $69.62 0.69%


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Disclaimer:
 The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

 

 

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