BNY Mellon's Trian Times
Financial-services stocks such as Bank of New York Mellon haven't been feeling the love lately. But operationally speaking, the custody bank and asset manager is turning into a success story thanks to shareholder activism -- and investors are starting to take notice.
A little more than two years ago, Trian Fund Management, the investment firm co-founded by Nelson Peltz, took an activist position in BNY Mellon. The business had been delivering sub-par margins that left its stock with a weaker valuation than peers, including State Street and Northern Trust. BNY Mellon embraced Trian's critiques and ideas -- better than most companies do -- and added Edward Garden, another Trian co-founder, to its board.
Now, their combined efforts have begun to pay off. On Thursday morning, BNY Mellon reported third-quarter profit of 90 cents a share, topping analysts' 81-cent average estimate, as costs declined and fee revenue increased. This is the seventh quarter in a row that earnings came in ahead of expectations, but the first time in a while that revenue also beat. BNY Mellon shares surged 3.2 percent to $41.73 as of 11:45 a.m. New York time, notably surpassing the $41 target price set by a Morgan Stanley analyst, the sole remaining "sell" recommendation in the group.
Financial-services stocks may be on the verge of a broader resurgence, as Nir Kaissar wrote earlier this week, pointing to upbeat results from the big banks. But BNY Mellon, which has a market value of $45 billion, is hitting specific goals that it set out to achieve when Trian started applying pressure: get up those margins.
BNY Mellon's pretax margin expanded the most in over a year to 33 percent -- or 35 percent on an adjusted basis, according to the company. Management did note that it benefited from seasonally higher fees from depositary receipt services, so its margin won't remain quite as high as 35 percent. However, they see room to continue driving efficiency on the investment-management side of the business. "We feel good that we can keep chomping away at the core structural costs of the company," Chairman and CEO Gerald Hassell said on the earnings call.
BNY Mellon's valuation is still on the lower side. Its price-to-book ratio of 1.2 compares with State Street's 1.5 and Northern Trust's 1.9, while the S&P 500 Asset Management and Custody Banks Index has a ratio of 1.7. But as BNY Mellon improves and sustains its margins, the stock should follow, especially if the industry as a whole is coming back.
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