In a market marked by rising interest rates and bond market volatility, The Bank of New York Mellon Corporation (BK) has emerged as a beacon of resilience. The global financial services company has weathered these challenges and continues to demonstrate strong growth potential. Recent interest rate hikes have pushed the yield on the benchmark 10-year Treasury note near 4.7%, while the 2-year note yield has surpassed 5%. Despite these headwinds, BK has proven its resilience, with its stock up more than 20%, including dividends, over the past year.
BK’s impressive performance can be attributed to several factors. The bank’s diverse business segments, including Securities Services, Market & Wealth Services, and Investment & Wealth Management, provide a comprehensive suite of capabilities for both buy-side and sell-side market participants, as well as leading institutional and wealth management clients globally. This diversification has helped BK mitigate the impact of volatile markets.
BK’s financial performance has also been strong. In the first quarter of 2024, the bank reported non-GAAP EPS of $1.29, exceeding analysts’ estimates. Revenue of $4.5 billion, up 3% year-over-year, also topped expectations. Stronger fee revenue and interest income contributed to the bank’s growth, offsetting elevated credit costs due to its commercial real estate exposure. Management reiterated its FY 2024 guidance, with expectations of a 10% decline in net interest income and flat expenses.
Looking ahead, analysts are optimistic about BK’s growth prospects. BofA Global Research forecasts an 8.5% increase in earnings for 2024, with accelerating EPS growth in subsequent years. By 2025, operating EPS is projected to reach $6. This growth is supported by the bank’s plans to leverage AI for productivity and return capital to shareholders.
While BK has cyclical exposure and could be impacted by a downturn in GDP, its attractive valuation and growth path make it a compelling investment. Assuming $6 of 2025 EPS and applying the stock’s historical non-GAAP forward P/E of 10.7, shares could trade near $64. The company’s valuation, growth forecast, and profitability metrics compare favorably to industry peers.
Technically, BK’s chart has improved significantly. Shares recently broke out above key resistance in the low to mid-$50s range, with a bullish upside measured move price objective near $70. This positive trend is supported by a rising 200-day moving average, indicating a bullish outlook.
In conclusion, I am upgrading BK from a hold to a buy. The bank’s resilience, growth potential, and attractive valuation make it a compelling investment in a challenging market environment. With its diverse business segments, strong financial performance, and positive technical outlook, BK is well-positioned for continued success.
