BNY Mellon: What’s Next After 40% Rally?

+8.81%
Upside
57.62
Market
62.70
Trefis
BK: Bank of New York Mellon logo
BK
Bank of New York Mellon

Despite a 40% rise since the March 23 lows of this year, at the current price of around $39 per share we believe BNY Mellon’s stock (NYSE: BK) has more to go. BNY Mellon’s stock has rallied from $27 to $39 off the recent bottom compared to the S&P which moved 37%. The stock is slightly beating the overall market as investors are positive about the impact of improved asset valuation on its asset servicing business. Further, it is still down 22% from levels seen in late 2019.

BNY Mellon’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential as its historical PE multiples imply it has further to go.

BNY Mellon’s revenues grew by roughly 6% over 2017 to 2019, which translated into similar growth in Net Income. Further, in terms of % of revenues, a slight decline in compensation costs, professional services expense, and net occupancy costs have enabled the net income margins to improve from 24.9% to 25.8% over the same period.

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While the company has steady revenue and earnings growth over recent years, its PE multiple has seen some decline. We believe the stock is likely to see a significant upside despite the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard ‘Why BNY Mellon Stock moved -23% between 2017 and now’ has the underlying numbers.

BNY Mellon’s PE multiple decreased from around 13.5x in 2017 to 11x at the end of 2019. While the company’s PE is down to about 8.5x now – a multiyear low, there is an upside when the current PE is compared to levels seen in the past few years – PE of around 11x at the end of 2019 and 2018.

So what’s the likely trigger and timing for further upside?

BNY Mellon is the world’s largest custodian bank by assets. It generates around 75% of its revenues from the Investment Servicing business and has roughly $35.7 trillion in Assets under Custody & Administration (as per 2019 data). The company could suffer losses due to a drop in asset valuations driven by net market losses, as it generates most of its revenues in the form of asset servicing fees, which are charged as a percentage of Assets under Custody & Administration (AUC/A). Notably, the recent rally in the securities market has improved the asset valuations to a large extent. While the company’s revenues for Q1 2020 saw some increase, we believe that Q2 results will likely see a drop in investment management and asset servicing revenues.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which put a floor under people’s fear — the market has been willing to “look through” the current weak period and take a somewhat longer-term view. With investors focusing their attention on 2020 results, the comparison between current and historic valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

While BNY Mellon stock has growth potential, there can be an even bigger opportunity when you compare Discover Financial with Mastercard.

 

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