Here is a look at how Bank of New York Mellon (NYSE:BK) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor - must pass all 6 of the following tests: Score = 4/6
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass all 3 of the following tests or be suitable for a defensive investor: Score = 2/3
- Earnings Stability - positive earnings per share for at least 5 years - FAIL
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|Value Based on 3% Growth||$25.83|
|Value Based on 0% Growth||$15.14|
|Market Implied Growth Rate||5.44%|
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
Bank of New York Mellon presents an interesting situation. The company does not qualify for the Defensive Investor because it has not had earnings stability over the ten-year period and has not adequately grown its earnings during that time frame. As for the Enterprising Investor, the company just barely doesn't meet the criteria, because it had a negative earnings year in 2009. This is interesting because once we move into the new year of estimates for earnings (for ModernGraham that will not occur until after the first quarter's earnings are released), this company will meet the final criteria for the Enterprising Investor. So this may be a situation where an Enterprising Investor takes a leap into what we normally would consider a "Speculative" company, but Enterprising Investors may be interested in reviewing ModernGraham's Valuation of JPMorgan Chase (NYSE:JPM) first.
From the valuation perspective, Bank of New York Mellon looks very attractive. The company has grown EPSmg (normalized earnings) from $0.88 in 2009 to an estimated $1.78 in 2013. This level of growth outpaces the market's implied estimate of 5.44%, and the company would appear to be undervalued at the present time.
What do you think? Do you agree that Bank of New York Mellon is undervalued? What would be your assessment? Is the company not suitable for Defensive Investors or Enterprising Investors?
Disclosure: The author did not hold a position in Bank of New York Mellon (BK) at the time of publication and had no intention of changing that position within the next 72 hours.