Bull of the Day: BNY Mellon (BK)

The Bank of New York Mellon BK, a Zacks Rank #1 (Strong Buy), is a long-term stock market winner within the Zacks Finance sector. The stock hit an all-time high earlier this month before experiencing a mild pullback over the past week as the market has continued its recent move lower. BK sports the highest Zacks Momentum Style Score of A, and this short-term decline is providing investors with a solid buying opportunity. BK is benefitting from an overall uptrend in financials as the Fed is set to embark upon its rate-hike journey over the next several years.

Company Description

BNY Mellon is a global investment company that provides a range of financial products and services and is dedicated to assisting clients in managing their financial assets throughout the investment lifecycle. Founded in 1784, BK offers investment services in 35 countries and is headquartered in New York, NY.

The firm operates in three segments: Investment Services, Investment and Wealth Management, and Other. The Investment Services segment provides activities such as trust and depositary, custody, accounting, transfer agency, securities lending, clearing, and enterprise data management. BK’s Investment and Wealth Management segment offers wealth and estate planning, private banking, and investment management products. The Other segment participates in services such as corporate treasury, leasing, and business exit strategies.

Recent Earnings and Future Estimates

Tuesday’s Q4 earnings announcement showed adjusted EPS of $1.04, a 1.96% beat over the $1.02 Zacks Consensus Estimate. The bottom line represented growth of 6% from the prior-year quarter. Higher fee income and growth in asset balances provided tailwinds for the Q4 results. Net income applicable to common shareholders rose to $881 million, up 1% year-over-year. Total revenues grew 5% versus the same quarter in 2020 to $4.04 billion, beating the Zacks Consensus Estimate of $3.97 billion.

Last year, BK posted total EPS of $4.18 which handily beat expectations of $3.93 by 6.4%. BNY Mellon boasts an impressive history in terms of earnings surprises, surpassing consensus estimates in each of the past eleven quarters. The company has delivered a trailing four-quarter average surprise of 6.55%.

The trend for earnings estimates is showing positive revisions as of late with current-year EPS estimates increasing by 4.69% in the past 60 days. Analysts are expecting 2022 EPS of $4.69, representing growth of 12.2% relative to last year. Revenues are anticipated to climb by 3.84% to $16.54 billion.

Charting the Course

BNY Mellon has advanced over 115% from the March 2020 bottom and is showing recent signs of relative strength. The stock continues to make a series of both 52-week and all-time highs and is up 2% this year while the S&P 500 is down over 4%. New highs are a sign of strength and indicate that institutional buying remains solid. BK is looking to find support at its 50-day moving average and the recent earnings beat may help provide a floor for any further selloff in the stock.

Zacks Investment ResearchImage Source: Zacks Investment Research

BK is part of the Zacks Banks – Major Regional industry group which ranks in the top 10% out of all 254 industry groups. Historical research has shown that roughly half of a stock’s future price movement can be attributed to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. With BNY Mellon in a top industry group, the stock will likely continue to experience a tailwind in terms of performance. Consensus earnings estimates will also provide a boost, moving up and to the right which is what investors like to see:

The Bank of New York Mellon Corporation Price, Consensus and EPS Surprise

The Bank of New York Mellon Corporation Price, Consensus and EPS Surprise

On the valuation front, BK appears undervalued irrespective of the metric used:

Zacks Investment Research

Image Source: Zacks Investment Research

Near-Term Outlook

The company maintains a solid balance sheet with cash and equivalents of $133.7 billion, far outpacing the total debt of $42.9 billion. BK boasts investment grade ratings of A1/A/AA- and a stable outlook from Moody’s, S&P, and Fitch, respectively. If an unforeseen negative economic event were to occur, the company should have no problem continuing to meet its debt obligations.

BK recently authorized share buybacks totaling $6 billion through the fourth quarter of 2022 and announced a dividend hike of +9.7% relative to prior levels. With a strong capital position, the company is expected to sustain its capital deployment programs.

BNY Mellon’s global expansion initiatives, durable assets under management (AUM) balance, and meticulous expense-management programs should support company financials in the near future. In July 2021, the firm announced its purchase of the Milestone Group, and last month BK inked a deal to buy Optimal Asset Management. As of September 30th 2021, BK had $2.3 trillion in AUM.

Bottom Line

With a history of surpassing earnings estimates and an improving future outlook, BNY Mellon represents a great opportunity. The Zacks #1 Strong Buy stock is a compelling investment with an attractive dividend yield (2.16%) and strong price momentum.

Solid institutional buying and a high-performing industry group should continue to provide a tailwind for the stock price. Recent positive earnings estimate revisions will help to provide a cushion during any potential market decline. If you’re looking for a way to diversify your portfolio, make sure to put BK on your shortlist.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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