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. 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.
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. 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 to get a sense of whether the company is a good investment.
In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. This is 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. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.
What follows is a specific look at how Northern Trust Corporation (NTRS) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Northern Trust Corporation is a financial holding company. The Company provides asset servicing, fund administration, asset management, fiduciary and banking solutions for corporations, institutions, families and individuals around the world. The Company’s operating segments include Corporate & Institutional Services (C&IS), Wealth Management and Treasury and Other. The Company has a network of offices in 19 states in the United States, Washington, D.C. and 20 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. Asset Management, through the Company’s various subsidiaries, supports the C&IS and Wealth Management segments by providing a range of asset management and related services and other products to customers around the world. The Company’s subsidiary is The Northern Trust Company.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass all 6 of the following tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||Pass|
|2. Earnings Stability||Positive EPS for 10 years prior||Pass|
|3. Dividend Record||Dividend Payments for 10 years prior||Pass|
|4. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||Fail|
|5. Moderate PEmg Ratio||PEmg < 20||Fail|
|6. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||Pass|
|Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.|
|1. Earnings Stability||Positive EPS for 5 years prior||Pass|
|2. Dividend Record||Currently Pays Dividend||Pass|
|3. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||2.43%|
|MG Value based on 3% Growth||$48.28|
|MG Value based on 0% Growth||$28.30|
|Market Implied Growth Rate||6.21%|
|% of Intrinsic Value||156.47%|
Northern Trust Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, as well as the high PEmg ratio. 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 overvalued after growing its EPSmg (normalized earnings) from $2.86 in 2011 to an estimated $3.33 for 2015. This level of demonstrated earnings growth does not support the market’s implied estimate of 6.21% 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 below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Northern Trust Corporation (NTRS)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Stage 3: Information for Further Research
|Number of Consecutive Years of Dividend Growth||4|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Shares Outstanding (Diluted Average)||235,233,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.92|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$3.33|
Other ModernGraham posts about the company
|5 Speculative and Overvalued Companies to Avoid – November 2014|
|20 Companies to Research This Week – 9/6/14|
|Northern Trust Corporation Annual Stock Valuation – 2014 $NTRS|
Other ModernGraham posts about related companies
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; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please review our detailed disclaimer.