Northern Trust (NTRS) is a financial services company headquartered in Chicago. The firm provides a range of buy-side investments and banking services. I am neutral on the stock.
Inconsiderable Debt Portfolio
Due to the rising yield environment, many investors are currently opting to invest in financial services stocks. However, it needs to be considered that the increased yield environment’s positive effects will be exclusive to financial sector stocks that have high exposure to the debt markets.
With only 21% of Northern Trust’s revenue deriving from interest-bearing activities, I fail to see how it will benefit from the debt market. I think Northern Trust is set to face an uncertain period with its fee-based buy-side model. Equity market volumes are due to calm down soon, which means that fewer high-net-worth investors will be looking to have their capital invested by Northern Trust.
Overvalued
The company’s stock is considerably overvalued relative to the sector. Northern Trusts’ price-to-earnings and price-to-sales ratios are trading at premiums of 73% and 22%, respectively. In addition, according to its PEG ratio, the stock price is trading at 3.9 times the current earnings growth.
No Momentum
Financial sector stocks have gained momentum recently, but Northern Trust has lagged the market. The stock’s currently trading below its 10 and 50 day moving averages while also failing to exit the 40-50 RSI range.
I can’t see any catalysts up ahead for a directional change in this stock’s price. Therefore, I think investors would be best off by divesting the stock from their portfolios, especially when considering its beta of 1.15, which exceeds the market’s risk.
Dividend Capacity Fulfilled
An alternative to seeking capital gains would be dividend income. However, Northern Trusts’ dividend capacity is truant. The firm’s currently paying a cash dividend premium of 75% relative to its five-year average. In addition, operating cash flows aren’t likely to benefit from the rising yield environment, as mentioned.
Wall Street’s Take
Turning to Wall Street, Northern Trust has a Moderate Buy consensus rating, based on six Buys, five Holds, and two sells assigned in the past eleven months. The average Northern Trust price target of $132.25 implies 17.5% upside potential.
Concluding Thoughts
Due to the current market sentiment, many investors will be looking out for financial services stocks to invest in right now. However, Northern Trust isn’t your best option as it has an insignificant loan portfolio and an overvalued stock.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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