BNY Mellon Stock Is Still A Good Bet

After almost a 50% gain since the March 23 lows of this year, at the current price of $42 per share we believe BNY Mellon Stock (NYSE: BK) has more to go. BNY Mellon, the custody banking giant, has seen its stock rally from $27 to $42 off the recent bottom compared to the S&P which moved around 65%. The stock is lagging the broader markets and is down 17% YTD. While the stock has reported better than expected Q3 results and positive revenue growth – cumulative nine months revenues of $12 billion were 2% above the year-ago period, mainly driven by a 4% rise in total fees & other revenue. Investors are positively cautious about the effect of lower interest rates on BNY Mellon’s top line – cumulative nine months net interest income declined by 3% y-o-y.

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BNY Mellon’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the gains since the March 23 lows, we feel that the company’s stock still has potential as its historic P/E multiples imply it has further to go.

The company’s revenues grew around 6% from $15.5 billion in 2017 to about $16.5 billion in 2019, which translated into a 9% increase in the net income figure over the same period. This was mainly due to a slight increase in the net income margin from 26.5% in 2017 to 27.1% in 2019.

While the company has seen steady growth in revenue over 2017-2019, its P/E multiple has decreased. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard “What Factors Drove 23% Change In BNY Mellon Stock Between 2017-End And Now?” has the underlying numbers.

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BNY Mellon’s P/E multiple has changed from just above 14x in FY 2017 to around 11x in FY 2019. While the company’s P/E is just above 9x now, this leaves some scope for an upside when the current P/E is compared to levels seen in the past years – P/E multiple of around 11x at the end of 2019 and just below 12x at the end of 2018.

So Where Is The Stock Headed?

BNY Mellon has seen a recovery in its Assets under Management (AuM) and Assets under Custody / Administration (AuC/A) over the last nine months, primarily due to higher market values and client-inflows. While AuC/A increased from $37.1 trillion on 31st December 2019 to $38.6 trillion by the end of September 2020, its AuM recovered from $1.91 trillion to $2.04 trillion over the same period. It is likely to benefit BNY Mellon’s top-line as the bank charges asset servicing fees and investment management fees as a % of AuC/A and AUM respectively. On the flip side, a drop in interest rates due to a lower rate environment is likely to hurt its net interest income. However, this decline is likely to be partially offset by the growth in assets. Hence, BNY Mellon’s revenues for the full year 2020 are unlikely to see a significant decrease, pacifying investor concerns and boosting BNY Mellon’s stock price.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

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