The Bank of New York-Mellon’s (BK) third-quarter 2011 earnings were in line with the Zacks Consensus Estimate. However, reduction in fee revenue and lower net interest margin were the headwinds. A low interest rate environment and various lawsuits filed against the company are expected to dent its profitability and lead to higher expenses over the medium term.
BNY Mellon shares currently trade at 8.9x our earnings estimate for 2011, 14% discount to the 10.3x for the industry average. On a price-to-book basis, the shares trade at 0.6x, 25% discount to the industry average.
Our six-month target price of $18.00 per share equates to about 8.2x our earnings estimate for 2011. Combined with a quarterly dividend of $0.13 per share, this target price implies an expected negative total return of 6.6% over that period, which is consistent with our Underperform recommendation on the shares.
