A "Prudent" Banking Trio: BB&T, Goldman Sachs & Mellon

02/01/2018 5:00 am EST

Focus: FINANCIALS

Jason Clark

Contributing Editor, The Prudent Speculator

Value investor Jason Clark — contributing editor to The Prudent Speculator — reviews a trio of bank stocks that have just posted earnings, explaining why the stocks have earned a boost in their target prices.

Shares of financial services company BB&T Corp (BBT) rose by more than 3% last week on the heels of a positive Q4 financial results release. Core 4Q EPS came in at $0.84, versus consensus Street estimates of $0.79.

Overall, we thought management’s 2018 guidance was supportive of higher forward EPS estimates driven by expectations for further efficiency improvements and greater clarity on the expense outlook and a potential inflection point in loan growth.

Additionally, we like management’s stated focus on deploying excess capital, via organic growth initiatives and dividend increases. We like that BBT continues to experience a strong adoption rate of its customizable digital banking platform. We are also fans of the company’s relatively conservative loan underwriting and its efforts to diversify its revenue stream.

While shares are off to a terrific start (up more than 10%) in 2018, we see additional upside potential on the back of a solid economy, rising interest rates, cost controls and benefits from tax reform. BBT yields 2.4% and trades at 14 times 2018 consensus earnings estimates. Our Target Price has been lifted to $62.

Despite a big sell-off following the announcement of Q4 results, shares of Goldman Sachs (GS) bounced back and closed the week slightly higher than they started.

While the Wall Street titan continued to deal with brisk headwinds in its Fixed Income, Currency and Commodity trading business, GS turned in a bottom-line beat (excluding tax legislation) that was more than 15% higher than investors were expecting. Goldman said those adjusted EPS came in at $5.68, versus a $4.90 analyst projection.


Advertisement


The firm also said it ranked first in worldwide announced and completed mergers and acquisitions for 2017, with its investment banking division producing its second highest annual net revenue number ever ($7.37 billion). Also during 2017, Investment Management generated record net revenue of $6.22 billion, including record management and other fees.

Assets under supervision increased 8% from 2016 to a record $1.49 trillion, with net inflows in long-term assets under supervision of $42 billion. Goldman also advanced its online consumer lending and deposit platform, Marcus: by Goldman Sachs, originating over $2 billion of loans and growing online deposits by over $5 billion.

Looking to 2018, we view the revenue outlook as mostly favorable given rising GDP growth, a higher Investment Banking pipeline, internal growth initiatives, tax reform benefits and relatively easy trading comparable numbers.

While expenses were larger than expected in Q4, we believe Goldman is locked in on keeping them under control, as well as managing its capital. Management guided to a 2018 tax rate of approximately 24%.

We continue to be long-term fans of GS and are constructive on the name given the prospects for stronger revenue growth, operating leverage, potential de-regulatory policies and a potentially higher earnings multiple than the current forward P/E of less than 12. Our Target Price for GS has been boosted to $286.

It was a roller-coaster ride, but when all was said and done, shares of Bank of New York Mellon (BK) fell as the financial giant reported Q4 financial results. Adjusted earnings per share came in at $0.91, which was largely in line with consensus analyst estimates.

Assets under custody/administration reached a record $33.3 trillion, reflecting higher market values, net new business and the favorable impact of a weaker U.S. dollar. The company had $1.9 trillion directly under management at the end of Q4, which was also a record. During 2017, BK repurchased 55 million of its common shares for $2.7 billion and paid $901 million in dividends.

While we believe that the quarter was a little messy, short-sighted investors were evidently disappointed that BK would not be returning the tax savings to shareholders. No doubt, we understand that many are not in the stock for its long-term prospects, but we do not mind that management is putting the tax dollars into significant digital investments, employee rewards and other initiatives that should pay off down the road.

We continue to like that BK is fairly well capitalized and has a management team that is committed to cost containment and driving growth for the future. BK shares are currently trading at less than 14 times NTM adjusted earnings expectations. Our Target Price has been nudged up to $63.

Subscribe to The Prudent Speculator here…