Feature Financial Services Industry Review

The Best Stocks of the Financial Services Industry – September 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 best value stocks of the Financial Services 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 550 companies reviewed by ModernGraham, 32 were identified as being closely related to the financial services industry.  Of those, only five are suitable for the Defensive Investor, nine are suitable for the Enterprising Investor, and the remaining eighteen are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 109.37% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 23.20.  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:

Ameriprise Financial Inc. (AMP)

Ameriprise Financial Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, while the Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.42 in 2011 to an estimated $7.45 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.92% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.  (See the full valuation)

American Express Company (AXP)

American Express passes the initial requirements of the Enterprising Investor but not the Defensive Investor. In fact, the company passes every requirement of the Enterprising Investor types, but the Defensive Investor is concerned by the high PB ratio. 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 $3.11 in 2011 to an estimated $4.99 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of 3.43% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 12% 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 American Express is significantly undervalued at the present time. (See the full valuation)

Franklin Resources Inc. (BEN)

Franklin Resources Inc. qualifies for both the Defensive Investor and the Enterprising Investor.  The company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong fundamentals.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.23 in 2011 to an estimated $3.41 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.47% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Bank of New York Mellon (BK)

Bank of New York Mellon passes the initial requirements of the Enterprising Investor but not the Defensive Investor. In fact, the company passes every requirement of the Enterprising Investor types, but the Defensive Investor is concerned by the lack of earnings stability and insufficient earnings growth over the last ten years. 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 $1.30 in 2011 to an estimated $2.14 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of only 5.72% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged nearly 13% 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 Bank of New York Mellon is significantly undervalued at the present time. (See the full valuation)

BlackRock Inc. (BLK)

BlackRock Inc. passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor has no initial concerns, while the Enterprising Investor is only concerned by 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, it has grown its EPSmg (normalized earnings) from $9.43 in 2011 to an estimated $17.67 for 2015. This is a fairly strong level of demonstrated growth and outpaces the market’s implied estimate for annual earnings growth of 5.38% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 17.5% 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 BlackRock Inc. is significantly undervalued at the present time. (See the full valuation)

Capital One Financial (COF)

Capital One Financial Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, while the Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.25 in 2011 to an estimated $6.96 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.35% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Invesco Limited (IVZ)

Invesco Limited qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned with the low current ratio.  The Enterprising Investor has concerns with the level of debt relative to the current assets, but is willing to overlook those issues since the company meets the more conservative Defensive Investor’s requirements.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.22 in 2011 to an estimated $2.17 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.49% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value well above the price. (See the full valuation)

KKR & Co. Limited (KKR)

KKR & Co. LP qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the short history as a publicly traded company, 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 $0.44 in 2011 to an estimated $1.83 for 2015.  This level of demonstrated growth is greater than the market’s implied estimate of 2.32% 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)

Legg Mason Inc. (LM)

Legg Mason Inc. (LM) qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years and the high PEmg ratio.  The Enterprising Investor is only initially concerned by the lack of earnings stability over the last five years.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $0.53 in 2012 to an estimated gain of $1.73 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.15% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Lincoln National Corporation (LNC)

Lincoln National Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, while the Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.80 in 2011 to an estimated $5.48 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.88% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Moody’s Corporation (MCO)

Moody’s Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the high PEmg and PB ratios, while the Enterprising Investor is only concerned with the level of debt relative to the net current assets. Therefore, all Enterprising Investors should feel very comfortable proceeding with the next stage of the analysis, which is a determination of an estimate of intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.16 in 2011 to an estimated $4.04 for 2015. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 9.07% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of around 17.38%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating Moody’s Corporation is fairly valued at the present time. (See the full valuation)

T. Rowe Price Group Inc. (TROW)

T.Rowe Price performs well in the ModernGraham model and is suitable for both Defensive Investors and Enterprising Investors. The Defensive Investor is only concerned with the high PB ratio, while 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 valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $2.38 in 2011 to an estimated $4.22 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 4.99% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 15.5% annually, 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 estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time. (See the full valuation)

The Good

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

Visa Inc. (V)

Visa Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short history as a publicly traded company and the high PEmg and PB ratios.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.87 in 2011 to an estimated $1.98 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 13.70% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price. (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.  For the investor type, a “D” indicates the company is suitable for the Defensive Investor, an “E” indicates the company is suitable for the Enterprising Investor, and an “S” indicates the company is considered speculative at this time.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
AMG Affiliated Managers Group, Inc. S 8/28/2015 $310.46 $176.94 56.99% 21.95 N/A
AMP Ameriprise Financial, Inc. E 8/14/2015 $286.80 $109.56 38.20% 14.71 2.45%
AXP American Express Company E 7/31/2015 $132.71 $75.31 56.75% 15.09 1.54%
BEN Franklin Resources, Inc. D 9/4/2015 $83.40 $39.30 47.12% 11.52 1.53%
BK Bank of New York Mellon Corp E 7/15/2015 $59.93 $39.33 65.63% 18.38 1.73%
BLK BlackRock, Inc. D 7/29/2015 $613.32 $301.42 49.15% 17.06 2.89%
CBG CBRE Group Inc S 1/24/2015 $44.33 $32.52 73.36% 28.28 N/A
CME CME Group Inc S 10/6/2014 $32.76 $93.47 285.32% 29.77 2.14%
COF Capital One Financial Corp. E 8/31/2015 $191.77 $75.87 39.56% 10.90 2.11%
DNB Dun & Bradstreet Corp S 9/4/2015 $92.11 $105.30 114.32% 16.43 1.76%
EFX Equifax Inc. S 4/4/2015 $43.53 $97.86 224.81% 37.93 1.19%
ETFC E*TRADE Financial Corp S 1/26/2015 $15.25 $27.21 178.43% 68.03 N/A
FIS Fidelity National Information Services S 5/11/2015 $83.77 $68.72 82.03% 29.12 1.51%
GS Goldman Sachs Group Inc S 11/10/2014 $71.04 $186.05 261.89% 13.29 1.40%
HRB H & R Block Inc S 2/17/2015 $44.54 $35.72 80.20% 23.66 2.24%
ICE Intercontinental Exchange Inc S 5/9/2015 $186.80 $235.14 125.88% 29.36 1.28%
IVZ Invesco Ltd. D 7/15/2015 $69.75 $32.74 46.94% 15.09 3.30%
KKR KKR & Co. L.P. E 7/26/2015 $70.63 $18.33 25.95% 10.02 9.17%
LM Legg Mason Inc E 9/1/2015 $66.58 $42.52 63.86% 24.58 1.88%
LNC Lincoln National Corporation E 8/13/2015 $211.11 $49.74 23.56% 9.08 1.61%
LUK Leucadia National Corp. S 5/19/2015 $0.00 $20.92 N/A 59.77 1.20%
MAIN Main Street Capital Corporation S 7/30/2015 $39.70 $28.44 71.64% 11.38 7.59%
MCO Moody’s Corporation D 6/16/2015 $139.73 $100.82 72.15% 24.96 1.35%
MHFI McGraw Hill Financial Inc S 7/21/2015 $23.78 $93.54 393.36% 34.39 1.41%
MS Morgan Stanley S 2/2/2015 $10.58 $33.87 320.13% 20.04 1.77%
NAVI Navient Corp S 7/29/2015 $85.14 $12.64 14.85% 5.72 5.06%
NDAQ Nasdaq Inc S 3/27/2015 $34.13 $51.33 150.40% 23.12 1.95%
NTRS Northern Trust Corporation E 9/3/2015 $44.50 $69.90 157.08% 20.99 2.06%
SCHW Charles Schwab Corp S 3/29/2015 $4.90 $30.60 624.49% 39.23 0.78%
SLM SLM Corp S 8/7/2015 $48.30 $8.02 16.60% 6.42 N/A
TROW T. Rowe Price Group Inc D 6/16/2015 $133.91 $70.92 52.96% 16.81 2.93%
V Visa Inc E 8/22/2015 $76.36 $70.21 91.95% 35.46 0.68%

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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.

For the investor type, a “D” indicates the company is suitable for the Defensive Investor, an “E” indicates the company is suitable for the Enterprising Investor, and an “S” indicates the company is considered speculative at this time.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
AMG Affiliated Managers Group, Inc. S 8/28/2015 $176.94 N/A
AMP Ameriprise Financial, Inc. E 8/14/2015 $109.56 2.45%
AXP American Express Company E 7/31/2015 $75.31 1.54%
BEN Franklin Resources, Inc. D 9/4/2015 $39.30 1.53%
BK Bank of New York Mellon Corp E 7/15/2015 $39.33 1.73%
BLK BlackRock, Inc. D 7/29/2015 $301.42 2.89%
CBG CBRE Group Inc S 1/24/2015 $32.52 N/A
CME CME Group Inc S 10/6/2014 $93.47 2.14%
COF Capital One Financial Corp. E 8/31/2015 $75.87 2.11%
DNB Dun & Bradstreet Corp S 9/4/2015 $105.30 1.76%
EFX Equifax Inc. S 4/4/2015 $97.86 1.19%
ETFC E*TRADE Financial Corp S 1/26/2015 $27.21 N/A
FIS Fidelity National Information Services S 5/11/2015 $68.72 1.51%
GS Goldman Sachs Group Inc S 11/10/2014 $186.05 1.40%
HRB H & R Block Inc S 2/17/2015 $35.72 2.24%
ICE Intercontinental Exchange Inc S 5/9/2015 $235.14 1.28%
IVZ Invesco Ltd. D 7/15/2015 $32.74 3.30%
KKR KKR & Co. L.P. E 7/26/2015 $18.33 9.17%
LM Legg Mason Inc E 9/1/2015 $42.52 1.88%
LNC Lincoln National Corporation E 8/13/2015 $49.74 1.61%
LUK Leucadia National Corp. S 5/19/2015 $20.92 1.20%
MAIN Main Street Capital Corporation S 7/30/2015 $28.44 7.59%
MCO Moody’s Corporation D 6/16/2015 $100.82 1.35%
MHFI McGraw Hill Financial Inc S 7/21/2015 $93.54 1.41%
MS Morgan Stanley S 2/2/2015 $33.87 1.77%
NAVI Navient Corp S 7/29/2015 $12.64 5.06%
NDAQ Nasdaq Inc S 3/27/2015 $51.33 1.95%
NTRS Northern Trust Corporation E 9/3/2015 $69.90 2.06%
SCHW Charles Schwab Corp S 3/29/2015 $30.60 0.78%
SLM SLM Corp S 8/7/2015 $8.02 N/A
TROW T. Rowe Price Group Inc D 6/16/2015 $70.92 2.93%
V Visa Inc E 8/22/2015 $70.21 0.68%

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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. See my current holdings here.  This article is not investment advice and all readers are encouraged to speak to a registered investment adviser prior to making any investing decisions.  Please also read our full disclaimer.

 

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