ModernGraham Valuation: Bank of New York Mellon (BK)

moneyCompany Profile (obtained from Google Finance): The Bank of New York Mellon Corporation (BNY Mellon) is a global financial services company. The Company divides its businesses into two principal segments: Investment Management and Investment Services. It has an Other segment, which includes credit-related activities, the lease financing portfolio, corporate treasury activities (including its investment securities portfolio), its equity investments in Wing Hang Bank Limited and ConvergEx Group, business exits and corporate overhead. Its two banks are The Bank of New York Mellon, which houses its institutional businesses, including asset servicing, issuer services, treasury services, broker-dealer and advisor services and the bank-advised business of asset management, and BNY Mellon, National Association (BNY Mellon, N.A.), which houses its wealth management business. In June 2013, the Company ceases to be Shareholder Of Cochlear Ltd.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 4/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 2/3

  1. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $68.58
MG Opinion Undervalued
Value Based on 3% Growth $25.83
Value Based on 0% Growth $15.14
Market Implied Growth Rate 5.44%
PEmg 19.39
PB Ratio 1.07

Balance Sheet – 9/30/2013 

Total Debt $19,733,000,000
Total Assets $371,952,000,000
Intangible Assets $18,025,000,000
Total Liabilities $334,993,000,000
Outstanding Shares 1,148,520,000

Earnings Per Share

2013 (estimate) $1.82
2012 $2.06
2011 $2.03
2010 $2.11
2009 -$0.93
2008 $1.22
2007 $2.38
2006 $1.93
2005 $2.03
2004 $1.85
2003 $1.52

Earnings Per Share – ModernGraham 

2013 (estimate) $1.78
2012 $1.61
2011 $1.37
2010 $1.15
2009 $0.88
2008 $1.82

Conclusion:

Bank of New York Mellon presents an interesting situation.  The company does not qualify for the Defensive Investor because it has not had earnings stability over the ten year period and has not adequately grown its earnings during that time frame.  As for the Enterprising Investor, the company just barely doesn’t meet the criteria, because it had a negative earnings year in 2009.  This is interesting because once we move into the new year of estimates for earnings (for ModernGraham that will not occur until after the first quarter’s earnings are released), this company will meet the final criteria for the Enterprising Investor.  So this may be a situation where an Enterprising Investor takes a leap into what we normally would consider a “Speculative” company, but Enterprising Investors may be interested in reviewing ModernGraham’s Valuation of JP Morgan Chase first.  From the valuation perspective, Bank of New York Mellon looks very attractive.  The company has grown EPSmg (normalized earnings) from $0.88 in 2009 to an estimated $1.78 in 2013.  This level of growth outpaces the market’s implied estimate of 5.44%, and the company would appear to be undervalued at the present time.

What do you think?  Do you agree that Bank of New York Mellon is undervalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Bank of New York Mellon (BK) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill


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