Bank of New York Mellon: Stick with a Proven Winner

The Bank of New York Mellon (BK), not to be confused with the other BK, Burger King (BKC), is the home of the subprime-broiled positive return. Why? Because while over the past year the overall financial sector (XLF) has declined some 28%, Bank of New York Mellon squeezed out a 4% gain. Not only did that out pace the overall market, but on a relative basis that decimated the rest of the sector- somewhere around a 32% out performance.

Even so, BK is not mentioned often- compared to Wells Fargo (WFC) and US Bancorp (USB), which continually are praised for their conservative management and the fact they are big Buffet holdings. That's great and all, but the market doesn't lie. In fact at the end of 2007, BK was up 9%; USB and WFC were down around 10% and 20%, respectively. So much for their ability to weather the storm.

Recently the company reported 1st quarter earnings (see conference call transcript) of $0.72 per share, compared with $0.62 per share a year prior, missing the consensus estimate of $0.73 per share by a penny. This was partially due to a $73 million write-down in their securities for sale portfolio; a $200 million CDO write-down was reported in the 4th quarter. Compare this with USB’s $293 million and $225 million, for Q1 ’08 and Q4 ’07. Additionally, revenue was up 14%, year-over-year, with 33% of revenues coming from outside the U.S. compared to 28% for Q1 of ’07.

Bank of New York Mellon’s core securities portfolio consists of 95% AAA-rated, 4% AA-rated and 1% A-rated securities. Total non-performing loans amount to $210 million; compare that to $845 million of non-performing loans at US Bancorp, and $4.5 billion at Wells Fargo- granted though, Wells has twice the market cap of BK or USB.

BK currently trades at 15 times 2008 earnings estimates and has a 1.8 price-to-book ratio. The stock is near the top end of it’s range, which has been between $40 and $46. If you are one that believes now is the time to be buying financials, Bank of New York Mellon deserves a spot on your shopping list. Stocks like Citigroup (C) or BofA (BAC) have been beaten down so badly that they may have more room to rise; but being that the outlook is still uncertain, I would much rather stick with a market-proven winner.

Disclosure: Author has a long position in BK

Comments

[Leser]

Chris Santiago is "right on the money" in more ways than one. Good research, in my opinion.