Unlocking Growth Through Critical Asset Management And Digital Expansion

Key Takeaways

• Investments in digital marketing and wealth management expansion could positively impact trust fee revenue and net margins.
  
• Monetization of Visa stock and share repurchases could support growth in earnings per share through capital return initiatives.
  
• Northern Trust's financial stability could be threatened by market downturns, operational changes, and investment portfolio vulnerabilities.

Catalysts

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

• Strong underlying equity markets and favorable client activity levels have contributed positively to Trust fees, which could enhance revenue growth.
  
• The monetization of Northern Trust's Visa Class B common stock stake and the use of proceeds for share repurchases could support earnings per share growth through capital return initiatives.
  
• Investments in digital marketing initiatives and the expansion of wealth management services, including new office openings, could drive future growth in trust fee revenue, impacting both revenue and net margins positively.
  
• The asset management sector's positive liquidity flows and the launch of new funds, particularly in fixed income solutions and global liquidity business, could increase assets under management, positively affecting management fee revenue.
  
• A focused approach to asset servicing, emphasizing scalable new business with multiple points of connectivity at attractive margins, could improve profitability and contribute to revenue growth through enhanced service offerings.

Assumptions

• Analysts are assuming Northern Trust's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.7% today to 20.2% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $8.1) by about September 2027, up from $1.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2027 earnings, up from 12.1x today. This future PE is lower than the current PE for the US Capital Markets industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 2.59% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.54%, as per the Simply Wall St company report.

Risks

• The company's significant reliance on strong underlying equity markets for its earnings boosts poses a risk, as downturns in the market can adversely affect revenue and earnings.
  
• A restructuring charge of approximately $200 million indicates ongoing operational changes and cost-cutting measures, which, if not executed efficiently, could lead to operational disruptions impacting revenue and net margins.
  
• Asset servicing business's focused approach on high-value opportunities and disciplined pricing might limit revenue growth potential in the short term if market conditions abruptly change or if competitors adopt more aggressive pricing strategies.
  
• The dependence on transaction volumes and capital markets activities for revenue in its asset servicing business could lead to fluctuations in earnings if market volatility affects transaction volumes.
  
• The significant unrealized pretax loss on available-for-sale securities could indicate vulnerability in the investment portfolio, potentially impacting net earnings if market conditions deteriorate.

Valuation

• The analysts have a consensus price target of $91.04 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 $102.0, and the most bearish reporting a price target of just $82.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.8 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 8.5%.
• Given the current share price of $90.07, the analyst's price target of $91.04 is 1.1% higher. 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.