Northern Trust

Mixed outlooks are revealed for Northern Trust’s future stock performance

By Jinman li
Medill Reports

Analysts and shareholders have mixed outlooks for Northern Trust Corp.’s stock price in the next 12 to 24 months, with changes in interest rate and the potential to expand just some of the challenges the financial services company faces.

Although just one of the 21 analysts polled by Bloomberg has a sell rating on Northern Trust’s stock, seven analysts rate it as a buy and 13 rate it a hold, with an average 52-week price target at $111.55. The stock closed at $107.04 on Tuesday. Its 52-week low was on May 17 at $85.41, and its 52-week high was on March 12 at $110.81.

“They’re close to being undervalued, but just not quite there yet,” said Jeffery Harte, an analyst at Sandler O’Neill & Partners LP who has a hold rating on the stock. “It’s a pretty good company with really good growth prospects, but it also has a much higher valuation P/E multiple than its peers, so it is priced appropriately.”

The trailing 12-month price-to-earnings ratio for Northern Trust, which measures its share price relative to its per-share earnings, is 20.96, compared with the financial sector average of 19.60, according to data compiled by Reuters.

Northern Trust released its fourth-quarter earnings of 2017 on Jan. 24, reporting diluted earnings per share at $1.51, compared with $1.11 per share in the year-ago period. The net income for the fourth quarter in 2017 was $356.6 million, up 34 percent from $266.5 in the prior year.

The full-year net income totaled $1.2 billion, up 16 percent from the prior year. Earnings per diluted share for the full year was $4.92, an improvement of 14 percent versus 2016.

“Our full-year performance resulted in record net income and improvements in profitability and returns,” said Michael O’Grady, president and chief executive officer, in a press release on Jan. 24.

Trust, investment and other servicing fees, the largest component which represented about 63.4 percent of the revenue last year, grew 10 percent due to favorable markets and new business across segments and geographies, said Biff Bowman, chief financial officer, on the company’s fourth-quarter conference call on Jan. 24.

“Market-centric” is the way Sandler O’Neill’s Harte describes Northern Trust, which means its performance is closely associated with the overall market operating environment, including the GDP growth, the stock market performance, and the international market.

“It’s in a good position to gain market share,” said Harte.

The company has a full-service offering like their larger competitors do, while being a bit smaller than those competitors, Harte added.

The Chicago-based financial services company strengthened its global presence after it closed the acquisition of UBS Asset Management’s fund administration units, which will expand its asset management service in Luxembourg and Switzerland, in the last quarter of 2017. That followed the 2016 acquisition of Aviate Global LLP, an international institutional equity brokerage firm based in London, New York, Hong Kong and Sydney.

The company will continue to expand in the near future, either geographically by purchasing custody businesses from smaller companies or by acquiring ancillary units to add to its specialties, said Marty Mosby, an analyst at Vining Sparks IBG LP. Mosby rates Northern Trust as a market outperform, with a 52-week price target at $123.

The biggest challenge facing Northern Trust is to keep up with the technology upgrades, some of which could be disruptive to the traditional financial industry, Mosby said.

“If the blockchain makes record-keeping instantaneous, the need for what they do would be lessened,” he said.

The financial institutions now serve as intermediaries for people to conduct financial activities, but the application of the decentralized and instantaneous blockchain technologies will make those traditional transaction hubs useless, Mosby said.

In line with this mindset, Northern Trust is now stepping up to embrace the new technologies. One year after it launched the first commercial deployment of blockchain technology for private equity in February 2017, the company now allows audit firms to gain near real-time access to fund data held on the private equity blockchain and complete their audit directly from there, according to a March 19 press release.

Improving cost efficiency, which means reducing costs while increasing income, is another issue Northern Trust is tackling. The company’s non-interest expenses totaled $1 billion in the fourth quarter, up 15 percent year-over-year and 7 percent sequentially.

JP Morgan analyst Vivek Juneja raised his 52-week price target for Northern Trust to $109.50 from $103 on Feb. 15 to reflect estimate changes while maintaining the neutral rating.

“Its corporate and institutional business is growing fees solidly, but expense growth has also been high,” Juneja said in a note to investors.

Northern Trust is in the process of cutting expenses, said CFO Bowman on the Jan. 24 conference call. The company expects to achieve $250 million in expense run-rate savings by 2020, which is a measurement using the current condition as a projector of future performance.

Photo at top: The Northern Trust Company Building at 50 S. LaSalle St. in the Financial District of Chicago on Oct. 15, 2011. (Beyond My Ken)