2023-03-30 10:56:30 ET
Summary
- The Financials sector is down about 20% in March following the regional banking crisis.
- I see shares of BNK Mellon near their fair value assuming a decline in EPS estimates on the horizon - we should know more after the firm reports Q1 results.
- There are key levels on the chart to monitor.
The Financials sector has endured a tough March as the banking crisis hurt nearly all the sector's stocks. With a more than 20% decline through Wednesday this week, it has been the worst performer.
I see shares of Bank of New York Mellon (BK) as just slightly undervalued, but earnings estimates will likely have to come down given tighter credit markets. We should know a lot more after the banks report Q1 results in just a few weeks.
Financials Fallout Following the March Banking Turmoil
According to Bank of America Global Research, BNY Mellon is a global company dedicated to helping its clients manage and service their financial assets throughout the investment life cycle. The three segments (Securities Services, Market & Wealth Services, and Investment & Wealth Management) offer a comprehensive set of capabilities and expertise across the investment lifecycle, enabling the Company to provide solutions to buy-side and sell-side market participants, as well as leading institutional and wealth management clients globally.
The New York-based $36.0 billion market cap Asset Management and Custody Banks industry company within the Financials sector trades at a near-market 15.5 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.3% dividend yield, according to The Wall Street Journal.
Berkshire Hathaway (BRK.A) (BRK.B) has been trimming its stake in the bank, which is not a hopeful sign. Still, BK beat bottom-line estimates in each instance since Q2 2019.
On valuation , analysts at BofA see earnings rising at a strong clip this year and next. The Bloomberg consensus forecast is not quite as optimistic. Also, following tighter lending conditions and capital market conditions in the wake of the regional banking crisis, these numbers may have to be slashed by another 10% or so. Assuming that, I see forward earnings for this year perhaps near $4.40 and $4.70 next year.
Using those numbers and applying the stock's typical earnings multiple of 11.4, then we get a fair value near $50, but that could be on the high side still given higher interest rates today. Its price-to-book ratio is 0.94 compared with a 5-year average of 1.05, so that's probably fair.
Overall, I see the valuation as a hold.
BK: Earnings, Valuation, Dividend Yield Forecasts
Looking ahead, corporate event data from Wall Street Horizon show a confirmed Q1 2023 earnings date of Tuesday, April 18 BMO with a conference call later that morning. Before that, the bank holds its shareholder meeting on Wednesday, April 12, which could also stir up some volatility.
Corporate Event Risk Calendar
The Options Angle
Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $1.12 which would be a strong 30% rise from $0.86 of per-share profits earned in the same quarter a year ago. The stock has rallied after earnings in each of the previous three reporting days.
This time around, the options market has priced in a moderate 4.6% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the April reporting date. That is in line with previous pricing ahead of earnings. With a bit of a trading range developing, I am inclined to sell high-strike calls and low-strike puts based on the technicals outlined below.
BK: Strong Earnings Stock Price Reactions Lately
The Technical Take
BK was hit hard like many other banks in March. Notice in the chart below that shares fell below the mid to upper $40s, a key zone. But the stock also found support in the low $40s, briefly undercutting the December low, while finding buyers from a high volume-by-price zone. So, I see the stock as between important support and resistance, hence selling premium as outlined above could be the near-term play. There's longer-term resistance in the $52 to $53 range.
Overall, with the stock under its flat 200-day moving average, there's no clear trend, but the edge goes to the bears for now.
BK: Under Key Resistance Levels
The Bottom Line
I see shares of BK as near fair value here, and with the stock between support and resistance, a bull vs. bear struggle appears ongoing. I am a hold on the bank.
For further details see:
Bank of New York Mellon: Shares Near Fair Value Ahead Of Bank Earnings Season