Alternative Investments And Family Office Services Will Evolve Amid Volatility

Key Takeaways

• The focus on alternative investments and family office services is expected to drive revenue growth by meeting emerging client needs.
  
• Efficiency initiatives and high-value service expansion aim to optimize costs and boost net margins.
  
• Market volatility, currency risks, and regulatory changes could hinder Northern Trust's revenue growth and profitability, amid intense competition in wealth management services.

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 alternative investment solutions, family office services, and liquidity solutions positions them to capitalize on emerging client needs and opportunities, potentially driving revenue growth.
  
• Successful fundraising within the Asset Management segment, especially in alternatives, along with growing new business activity in Asset Servicing, are poised to enhance revenue streams and improve net margins.
  
• Expansion of high-value services such as the Family Office Solutions and broadening the Global Family Office clientele, particularly in international markets, are likely to boost revenues and strengthen net margins.
  
• Strategic productivity initiatives, such as reengineering the operating model to enhance efficiency and standardize services, are expected to optimize costs and improve net margins over time.
  
• The roll-out of new fixed income ETFs and investment in custom tax optimized SMAs is expected to drive significant growth in assets under management, potentially boosting fee revenues and enhancing earnings.

Northern Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northern Trust's revenue will decrease by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.0% today to 17.9% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $9.02) by about April 2028, down from $2.1 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 15.8x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 4.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Northern Trust Future Earnings Per Share Growth

Risks

• Market volatility and uncertainty can pause or delay decision-making by clients, which could potentially slow down new business growth or result in delayed revenue recognition from new client mandates, impacting future revenue projections.
  
• There are potential impacts from currency movements, which have previously unfavorably impacted revenue growth. This currency risk could continue to adversely affect net revenues and impact net margins.
  
• The competitive landscape in providing family office services and alternative investment solutions is intense, which could challenge Northern Trust's ability to attract or retain wealthy clients or investment mandates, potentially impacting growth in revenue streams.
  
• Regulatory changes, including those from the Basel III end game, could affect capital requirements and operational risks, potentially leading to increased expenses related to compliance or a need to allocate more capital, which could affect net margins or profitability.
  
• A potential reduction in equity markets or sustained low interest rate environment could negatively affect assets under management and lead to lower fee revenues from wealth management and asset servicing segments, thereby impacting earnings growth.

Valuation

• The analysts have a consensus price target of $105.464 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 $128.0, and the most bearish reporting a price target of just $79.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.1 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $89.36, the analyst price target of $105.46 is 15.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.