The Bank of New York Mellon Corporation’s (BK) reported its first-quarter 2010 results on April 20. Earnings from continuing operations for the reported quarter came in slightly below the Zacks Consensus Estimate. Investors were clearly indifferent to these results. As a result, there was no significant directional movement in the share price.
However, analysts covering the stock now have responded negatively as they had sufficient time to absorb and consider the near-term fundamental flaws.
Let’s now cover the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock.
Earnings Report Review
Giving the estimates a miss is a definite negative for the stock price. But a marginal difference inspires optimism for a stable future. A quick look at the financials reveals that BNY Mellon experienced an increase in revenues and assets under custody and administration during the reported quarter. However, there were several negatives that kept the company under pressure. Also, expenses related to acquisitions will continue to hurt earnings until the integration process is completed.
In February 2010, BNY Mellon acquired PNC Financial Services Group’s (PNC) investment services division for about $2.3 billion. This acquisition has increased BNY Mellon’s assets under administration by $855 billion.
Total revenues for the reported quarter increased 1% sequentially and 4% year over year. The increase in revenues was primarily due to an improvement in almost all the line items except Foreign exchange and other trading activities.
(Read our full coverage on this earnings report: BNY Mellon Falls Short)
Earnings Estimate Revisions – Overview
Following the earnings release, estimates have radically moved down. The estimate revision trends and the magnitude of such revisions justify the weakness in the stock. We will now go through the details of the earnings estimate revision to substantiate why an investor would not be interested in this stock.
Agreement of Estimate Revisions
Looking at the estimates revision trends, it becomes clear that a majority of the analysts have agreed on the weak FY2010 outlook for BNY Mellon earnings. The following table shows that 7 analysts have lowered estimates for FY2010 and only 2 have moved in the opposite direction over the last 30 days.
Also, for FY2011, 7 analysts have lowered estimates, while one upward revision was witnessed. The lower number of upward estimate revisions for FY2010 and FY2011 indicates a likelihood of downward pressure on the performance of the stock in the near term.
Magnitude of Estimate Revisions
Estimates for FY2010 deteriorated a nickel from the earnings of $2.34 per share to $2.29 since the earnings announcement. Also, the estimates for FY2011 moved down from earnings of $2.80 per share to $2.77. The magnitude of the downward estimate revisions indicates why it is better to avoid adding BNY Mellon to an investor’s portfolio.
Our Take
In terms of credit quality, the company maintains a better profile than most of its banking peers, with the lowest exposure to consumer or construction loans. Though BNY Mellon is well positioned to benefit from the growth of global financial assets, supported by an effective expense management, modernization of public pension schemes and growth in cross-border investing, we expect interest-bearing deposit costs to rise faster than asset yields due to competitive pressure, thereby negatively impacting net interest margin as well as net interest income.
The estimate revision trends, magnitude of revising the estimates and lower number of upward estimate revisions clearly portray the potential for significant downward pressure on the stock over the near term.
However, BNY Mellon shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation.
Considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “BK”
Read the full analyst report on “PNC”
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