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BNY Mellon Is Set to Take Full Control of New York-Based HedgeMark International
Posted by: Damian Illia (IP Logged)
Date: April 1, 2014 05:13PM

The Bank of New York Mellon Corporation (BK) provides financial products and services in domestic and international markets. Principal segments are: Investment Management, comprised of its affiliated investment management boutiques, wealth management business and global distribution companies; and Investment Services, which provides global custody and related services, broker-dealer services, collateral services, alternative investment services, corporate trust and depositary receipt services, and clearing services and global payment/working capital services.

In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

Recent Acquisition

The bank announced that it has signed an agreement to acquire the remaining 65% interest of HedgeMark International LLC, which is a specialist in the structuring, oversight, and risk monitoring of hedge fund investments. The deal is expected to close in the second quarter, subject to regulatory approval. "As institutional clients continue their shift into alternatives, especially hedge funds, this acquisition will enable us to better meet demands for improved governance, risk reporting, and transparency," says Samir Pandiri, BNY Mellon executive vice president and CEO of Asset Servicing.

Well Capitalized

As of Dec 31, 2013, Tier 1 capital ratio was 16.2%, up from 15.0% as of Dec 31, 2012; Tier 1 total capital ratio was 17.0%, up from 16.3% as of Dec 31, 2012; and leverage of 5.4% were well above the regulatory requirements. It is expected that the bank continuous focusing on building capital over time.

Dividend & Share Repurchases

Looking at the financials, the company has a strong balance sheet: good cash that allows the company to hike its dividend payout of $0.15 per share, reflecting a dividend yield of 1.7%, lower than the industry average of 3.22%. Furthermore, last year the board of directors has also authorized a new share repurchase program allowing the company to repurchase up to $1.35 billion of the company’s common stock. As of Dec 31, 2013, the company had $385 million worth of shares left under this repurchase authorization.

Analyst Recommendation

The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral.” A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 10.56%, very similar to the S&P 500. For investors looking for a better Zacks Rank, Wells Fargo & Company (WFC), BankUnited Inc. (BKU), Fifth Third Bancorp (FITB) or KeyCorp. (KEY) could be better options.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 20.2x, trading at a premium compared to an average of 12.7x for the industry. To use another metric, its price-to-book ratio of 1.13x indicates a premium versus the industry average of 1x and the price-to-sales ratio of 2.7x is below the industry average of 5.9x. The first two metrics indicate that the stock is relatively overvalued relative to its peers.

Earnings per share (EPS) decreased in the most recent quarter compared to the same quarter a year ago (from $0.53 to $0.44). In the next graph we can see that it has demonstrated an interesting positive trend since mid-2012. We include the stock price because EPS often lead the stock price movement. The last year, the stock´s share price has jumped by 25.44%, exceeding the S&P 500 performance.

1396373209277.png

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. With a trailing 12 months (as of Dec. 31, 2013) ROE of 5.77% is below the industry mean of 7.33%. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

BK

Bank of New York

5.77

BCS

Barclays PLC

2.09

JPM

JPMorgan Chase & Co.

8.63

STT

State Street Corporation

10.36

As we can see, it has a ratio which is higher than the one registered by Barclays Plc (BCS), but lower than JPMorgan Chase & Co. (JPM) and State Street Corporation (STT).

Final Comment

As outlined in this article, good capital ratios, the agreement to take full ownership of HedgeMark International and the repurchase program make me feel bullish on this stock.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Robert Olstein (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio) have also invested in it.

Disclosure: Damian Illia holds no position in any stocks mentioned.




Guru Discussed: Diamond Hill Capital: Current Portfolio, Stock Picks
Stocks Discussed: BK, BCS, JPM, STT,
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