In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period. Â Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation. Â We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before. Â By continuing to require the same standards for the historical period, Intelligent Investors are able to whittle down banks to only those with the best financial position, and then they are able to determine an intrinsic value toÂ get a sense of whether the company is a good investment. Â In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Bank of New York Mellon (BNY)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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 May 2014, the Company acquired HedgeMark International, LLC, a provider of hedge fund managed account and risk analytic services.
Defensive Investor – must pass all 6 of the following tests: Score = 4/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- 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 -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- 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 = 3/3
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$30.08|
|Value Based on 0% Growth||$17.63|
|Market Implied Growth Rate||4.64%|
Balance Sheet – SeptemberÂ 2014
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Bank of New York MellonÂ qualifies forÂ the Enterprising Investor but not the Defensive Investor. Â 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. Â As a result, Enterprising InvestorsÂ 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. Â As for a valuation,Â theÂ company appears undervalued after growing its EPSmg (normalized earnings) from $1.17 in 2010 to an estimated $2.07 for 2014. Â This level of demonstrated growth outpaces the market’s implied estimate of 4.64% earnings growth and leads theÂ ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Bank of New York Mellon (BNY)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave a comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold aÂ position in Bank of New York Mellon (BNY)Â orÂ in any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.