Rating Update: Stock Rating C-Neutral (9/5/19)-Northern Trust Corp (NTRS).

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BUSINESS

Northern Trust Corporation, a financial holding company, provides asset servicing, fund administration, asset management, fiduciary, and banking solutions for corporations, institutions, families, and individuals worldwide. It operates through Corporate & Institutional Services (C&IS) and Wealth Management segments. The C&IS segment offers asset servicing and related services, including global custody, fund administration, investment operations outsourcing, investment management, investment risk and analytical services, employee benefit services, securities lending, foreign exchange, treasury management, brokerage services, transition management services, banking, and cash management services. This segment provides services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors.
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INVESTMENT RATING

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NTRS is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

Northern Trust has a current Value Trend Rating of C (Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing highly consistent signals. Northern Trust has a neutral Appreciation Score of 50 and a neutral Power Rating of 47, resulting in the Neutral Value Trend Rating.

Northern Trust’s stock is selling below targeted value. The current stock price of $90.02 compares to targeted value 12 months forward of $109.
This neutral appreciation potential results in an appreciation score of 50 (50% of the universe has greater appreciation potential.)
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Northern Trust has a Power Rating of 47. (This neutral Power Rating indicates that NTRS’ chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: is in a slightly weakened position current; and earnings estimate behavior for NTRS has been slightly negative recently. An offsetting factor is recent price action has been neutral.

INVESTMENT PROFILE

NTRS’ financial strength is exceptional. Financial strength rating is 99.
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Relative to the S&P 500 Composite, Northern Trust Corp has neutral Growth/Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that NTRS is lower risk. All factors are relative strengths. NTRS’ valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. NTRS has normal market capitalization.

CURRENT SIGNALS

Northern Trust’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; and rising tax keep rate.

Northern Trust’s current technical position is mixed. The stock price is in a 7.2 month up move. The stock has appreciated 25.5% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Northern Trust Corporation (NASDAQ: NTRS) has recently enjoyed significant positive changes in investment behavior: its shorter term price trend turned up.
The stock is currently rated C.
Northern Trust Corporation (NASDAQ: NTRS) stock enjoyed a major increase of 10.2% on 9/5/19. The shares closed at $39.93. However, this advance was accompanied by unusually low trading volume at 65% of normal. The stock has performed in line with the market over the last nine months and has risen 6.5% during the last week.

CASH FLOW

In 2018, Northern Trust experienced a significant decline in cash of -$11,842 million (-23%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$3,618 million. Non-operating uses consumed -$1,199 million (-33% of EBITDA). Cash taxes consumed -$401 million (-11% of EBITDA). Re-investment in the business amounted to -$14,265 million (-394% of EBITDA). On a net basis, debt investors contributed +$1,670 million (+46% of EBITDA) while equity investors pulled out -$1,264 million (-35% of EBITDA).
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Northern Trust’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Northern Trust Corp Peer Group. In most years, Northern Trust was in the third quartile and lower quartile. Currently, Northern Trust is slightly below median at -33% of EBITDA (-$1,199 million).

Northern Trust’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Northern Trust Corp Peer Group as well. In most years, Northern Trust was in the second quartile. Currently, Northern Trust is substantially above median at -11% of EBITDA (-$401 million).

Northern Trust’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Northern Trust Corp Peer Group. In most years, Northern Trust was in the top quartile and second quartile. Currently, Northern Trust is lower quartile at -394% of EBITDA (-$14,265 million).

Northern Trust’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Northern Trust Corp Peer Group. In most years, Northern Trust was in the second quartile and lower quartile. Currently, Northern Trust is above median at +46% of EBITDA (+$1,670 million).

Northern Trust’s Equity Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Northern Trust Corp Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp decline.) In most years, Northern Trust was in the third quartile and second quartile. Currently, Northern Trust is below median at -35% of EBITDA (-$1,264 million).

Northern Trust’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Northern Trust Corp Peer Group. In most years, Northern Trust was in the top quartile and third quartile. Currently, Northern Trust is lower quartile at -327% of EBITDA (-$11,842 million).
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Northern Trust’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Northern Trust Corp Peer Group. In most years, Northern Trust was in the top quartile. Currently, Northern Trust is upper quartile at +601%.

PROFITABILITY

Northern Trust’s return on equity reached a new post-2009 high in 2018.
This was due to minor positive trend in pretax operating return and small positive trend in non-operating factors.
The productivity of Northern Trust’s assets remained stable over the full period 2009-2019: asset turnover has exhibited little to no overall change although it experienced very sharp improvement from the 2014 level.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
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Northern Trust’s return on equity is upper quartile (15.3%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at median (1.5%) reflecting asset turnover that is above median (0.05X) and pretax margin at the lower quartile (28.1%).
Tax “keep” rate (income tax management) is at the lower quartile (79.0%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is upper quartile (12.75X).

GROWTH RATES

There are no significant differences between Northern Trust’s longer term growth and growth in recent years.
Northern Trust’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 6.7% per year. (More recently it has been 10.3%.)

Total asset growth has been 6.3% per year.

Annual E.P.S. growth has been 10.0% per year. (More recently it has been 13.9%.)

Equity growth has been 5.6% per year.
No consensus growth rate forecast is available for Northern Trust.
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Relative to the Northern Trust Corp Peer Group, Northern Trust’s historical growth measures are erratic. Revenue growth (6.7%) has been at the upper quartile. Total asset growth (6.3%) has been above median. Equity growth (5.6%) has been at median. E.P.S. growth (10.0%) has been below median.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Northern Trust’s stock price performance has been variable and below market. Between November, 2008 and September, 2019, Northern Trust’s stock price rose +96%; relative to the market, this was a -41% loss. Significant price move during the period: 1) September, 2011 – July, 2015: +119%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -8.0% is substantially below median relative to the S&P 500 Composite.
In addition to being substantially below median relative to S&P 500 Composite, current annual total return performance through July, 2019 of -8.0% is slightly above median relative to Northern Trust Corp Peer Group.

Current 5-year total return performance of 10.1% is slightly below median relative to the S&P 500 Composite.
Through July, 2019, with slightly below median current 5-year total return of 10.1% relative to S&P 500 Composite, Northern Trust’s total return performance is below median relative to Northern Trust Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, NTRS’ overall valuation is quite high. The highest factor, the price/earnings ratio, is near the lower quartile. Price/equity ratio is near the lower quartile. Ratio of enterprise value/assets is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable. Ratio of enterprise value/revenue is unavailable.

Relative to Northern Trust Corp Peer Group, NTRS’ overall valuation is exceptionally high. The highest factor, the price/equity ratio, is upper quartile. Price/earnings ratio is at the upper quartile. Ratio of enterprise value/assets is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable. Ratio of enterprise value/revenue is unavailable.
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VALUE TARGETS

NTRS is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Northern Trust’s current Price Target of $111 represents a +23% change from the current price of $90.02.
This neutral appreciation potential results in an appreciation score of 50 (50% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 50, the neutral Power Rating of 47 contributes to an Value Trend Rating of C.
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Northern Trust’s current Price Target is $111 (+3% from the 2018 Target of $107 and +23% from the 09/05/19 price of $90.02). This plateau in the Target is the result of a +17% increase in the equity base and a -12% decrease in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a slight positive impact.
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PTR’s return on equity forecast is 13.5% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2010 and 2018. The current forecast is above the 2011 low of 9%.

PTR’s growth forecast is 10.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2012 low of 2%.

PTR’s cost of equity forecast is 9.8% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2010 and 2018. The current forecast is above the 2012 low of 7.1%.
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At Northern Trust’s current price of $90.02, investors are placing a positive value of $16 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 8.0% per year, and a return on equity of 14.6% versus a cost of equity of 9.4%.
PTR’s 2020 Price Target of $111 is based on these forecasts and reflects an estimated value of existing assets of $77 and a value of future investments of $34.

About John Lafferty 80532 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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