One of the most stringent of the GuruFocus screeners is the Undervalued Predictable screener. Only 195 out of the 12,232 stocks followed by GuruFocus can make it through this screener, and ownership of those stocks can deliver better-than-average results.
Northern Trust Corp. (NTRS, Financial) joined the ranks of the Undervalued Predictable screener recently, indicating it has good potential for delivering above-average returns to shareholders.
About Northern Trust
The company is a financial holding company that conducts business through American and non-American subsidiaries. At its core is The Northern Trust Company, a bank headquartered in Chicago. The bank was formed in 1889.
Through the bank and its subsidiaries, the company provides wealth management, assets servicing, asset management and banking solutions. Its customers include corporations, institutions, families and individuals. According to its 10-K for 2021, it operates with two reporting segments.
The first is Corporate & Institutional Services, which offers asset servicing and related services to corporate and public retirement funds, foundations, fund managers and more. This segment operates in North America, Europe, the Middle East and Asia Pacific. At the end of calendar 2021, the segment had $27.92 trillion in assets under management.
The Wealth Management segment markets itself to high net worth individuals as well as families, business owners, executives and privately held businesses. Offices are located in 19 states and Washington D.C., London, Guernsey and Abu Dhabi. With $2.546 trillion of assets under its custody, administration or management, it claims to be one of the largest providers of advisory services in the U.S.
As a banking institution, the company now faces regulatory capital requirements, which it said in its third-quarter earnings release were strong. It wrote, “The capital ratios of Northern Trust Corporation and its principal subsidiary, The Northern Trust Company, remained strong at September 30, 2022, exceeding the minimum requirements for classification as 'well-capitalized' under applicable U.S. regulatory requirements.”
Competition
Northern Trust faces intense competition from many sources, including custodial banks, deposit-taking institutions, asset management firms and others.
GuruFocus compares it with State Street Corp. (STT, Financial) with $47.8 trillion under custody, administration and management and with Principle Financial Group Inc. (PFG, Financial), which manages $808.6 billion in assets.
The business strategy is to provide financial services to targeted market segments in which it sees a competitive advantage and good growth prospects. It also looks to identify and grow recurring sources of fee-based income and continual productivity improvement.
That strategy currently delivers a net margin of 22.97%, which is better than 75.28% of the asset management industry.
Undervalued
The first barrier to entry to the Undervalued Predictable list is that shares must sell for less than their intrinsic value, based on a discounted cash flow calculation. Using an earnings-based approach to the DCF, Northern Trust is significantly undervalued:
The 11.5% growth rate reflects the average earnings per share without non-recurring items growth over the past 10 years. Over the past five years, the average was 8.40% and looking at the one-year rate I see 30.80%. Here is the earnings story from a 10-year chart:
The chart tells me Northern was significantly affected by the Covid-19 pandemic. Earnings dipped significantly in 2020, after leveling out in 2019. They rebounded briskly in 2021, providing that 30.80% growth.
Undervaluation arises mainly out of the market-wide slump that has taken place in 2022 (and for some stocks, since late 2021).
Summarizing, Northern Trust is undervalued, mainly because its share price has been pulled down by the broader market and investor retreats.
Predictability
Northern Trust receives a full five out of five-star ranking for its predictability, and that is important for shareholders. GuruFocus explains there is only a 3% probability that a five-star stock will produce a loss if it is held for 10 years. On the other hand, there is a 16% chance a two-star stock will lose money after a decade.
Predictability is based on the consistency of revenue per share and Ebitda per share. As this chart shows, the company's revenue per share is extremely consistent:
There are no results for Ebitda per share since this metric does not apply to banks.
Returning to revenue, the following slide from the third-quarter investor presentation provides a glimpse into the company’s ability to consistently deliver revenue:
Northern Trust has a complementary revenue mix that has given it consistency over at least the past five quarters.
Other
The GF Value chart also concludes Northern Trust is undervalued, estimating its intrinsic value at $113.04 per share compared to the closing price on Oct. 28 of $83.96. The PEG ratio gives a modestly overvalued rating of 1.64.
Overall, the GF Score is relatively high at 87 out of 100 based on a mixed set of metrics: profitability rank, GF Value rank, momentum rank, financial strength rank and growth rank. As such, the company has good outperformance potential going forward.
With a market cap of $17.68 billion, its return on equity is 13.82% and the net margin is 22.97%.
The Chicago-based company has 11 gurus among its shareholders, the biggest of which are Barrow, Hanley, Mewhinney & Strauss with 2.25% of shares outstanding, PRIMECAP Management (Trades, Portfolio) and John Rogers (Trades, Portfolio).
Around 97.02% of its shares belong to institutional investors, while 0.86% belong to insiders. Michael G. O’Grady, the chairman, president and CEO, holds one of the biggest insider positions with 60,804 shares.
With the share price down significantly, the dividend yield has risen to 3.31%, while the dividend payout ratio is 0.39. Over the past decade, the company has repurchased shares relatively consistently, an average reduction of 1.73% per year.
Conclusion
Northern Trust ended up on the Undervalued Predictable list for two reasons. One reason is negative, which is that its share price has taken such a tumble over the past 10 months. It is not that it did anything wrong or bad; it is just a consequence of being on a stock exchange during a poor year.
The other reason is positive, and that is the predictability of its revenue per share growth, which has been highly consistent. That is an attribute that is prized by many investors, and given a bit of extra zip by its dividend yield.
