International Collaboration And Strategic Shifts Propel Promising Margin Growth

Key Takeaways

• Strategic international collaborations and operational efficiency improvements are expected to drive profitable growth and enhance margins.
  
• Wealth and Asset Management momentum, combined with new product launches, positions Northern Trust for future revenue growth.
  
• Expensive modernization investments and competitive pressures could hinder near-term revenue growth and profitability, while leadership changes and macroeconomic factors pose additional risks.

Catalysts

A financial holding company, provides wealth management, asset servicing, asset management, and banking solutions for corporations, institutions, families, and individuals worldwide.

• Northern Trust's strategic focus on international relationships and collaborations, such as with Artemis, is expected to drive profitable growth and enhance operating margins by leveraging its One Northern Trust strategy and cross-selling capabilities.
  
• Wealth Management's momentum, bolstered by leadership changes and record AUM levels, positions Northern Trust for future revenue growth and margin expansion through maturation of various initiatives started in the past 12-18 months.
  
• Asset Management's continued positive liquidity flows and new product launches, such as the treasury-only money market fund, are anticipated to strengthen revenue figures and broaden earnings streams while leveraging firm-wide client solutions.
  
• Northern Trust's efforts to enhance operational efficiency through organizational changes, including a new COO role focused on operational excellence, should drive cost efficiencies and positively impact net margins.
  
• The pivot in Asset Servicing towards scalable new business opportunities requiring lower incremental costs is expected to shift the business mix towards more profitable growth, enhancing margins and overall earnings potential.

Northern Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northern Trust's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.8% today to 16.8% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $9.07) by about November 2027, down from $1.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2027 earnings, up from 13.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 9.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.6%, as per the Simply Wall St company report.

Northern Trust Future Earnings Per Share Growth

Risks

• The company is focused on expensive investments in modernization and resiliency, which may not immediately contribute to revenue growth and could pressure net margins due to long-term implementation.
  
• A shift in focus towards scalable growth might delay immediate revenue benefits, affecting near-term earnings if new strategies take longer to materialize.
  
• Competitive pressures in the asset and wealth management sectors could limit Northern Trust's ability to increase net revenue growth in these segments, impacting overall profitability.
  
• Changes in leadership roles might lead to transitional inefficiencies, potentially affecting operational effectiveness and consequently net margins.
  
• Macroeconomic factors such as anticipated rate cuts could negatively impact net interest income, potentially reducing overall earnings growth.

Valuation

• The analysts have a consensus price target of $104.11 for Northern Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $84.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.9 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $106.84, the analyst's price target of $104.11 is 2.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.