Northern Trust Corporation (NASDAQ:NTRS) is one of the leaders in private banking and asset management, and operates 85 offices in the U.S., as well as 12 foreign locations. While I feel that financials in general are undervalued at the present time, it is still a good idea to seek out the companies that are the most resistant to bad economic times, and I think that Northern Trust may be one of the best examples in the sector. My question is, with shares just under their 52-week highs, is Northern Trust Corporation (NASDAQ:NTRS) still attractive, or would we be better off with another wealth management leader?
About Northern Trust: why is it recession-resistant?
Northern Trust Corporation (NASDAQ:NTRS) has $704 billion in assets under management and almost $5 trillion in assets under custody. Although it is not the largest company in its sector, it does have a leading position among affluent clients, which is the primary reason it does not suffer as badly as its competitors during recessions. In fact, over 20% of the wealthiest Americans are Northern Trust clients. The company is organized into two main business units: Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS).
The company has performed exceptionally well over the recent past, as seen in the chart below. There are two main points to take away from the chart. First, notice how consistent the company’s earnings have been: since 2005 the company has never earned less than $2.47 per share or more than $3.47 per share, a very narrow spread. As a comparison, Bank of America Corp (NYSE:BAC)’s earnings varied from a loss of 39 cents per share to a profit of $4.59. Second, notice how 2008 was actually Northern Trust Corporation (NASDAQ:NTRS)’s best year in terms of profitability, in direct contrast to virtually every other major financial.
But is it too expensive?
Over the past year Northern Trust’s share price has risen by about 25%, which naturally invokes the question of whether or not the company has become overvalued. Northern Trust Corporation (NASDAQ:NTRS) is expecting earnings of $3.22 per share this year, so it trades for right around 18 times this year’s earnings. The company is expected to grow its earnings significantly over the next couple of years, due to both cost-cutting efforts as well as rising interest rates, which are widely expected as the economy continues to improve. The consensus calls for $3.59 and $4.04 per share in 2014 and 2015, respectively, which means a 3-year average earnings growth rate of 12.9%, easily justifying the P/E. However, before we go diving in, let’s take a look at the competition to see if we can find an even better deal.
Alternative: Ameriprise Financial
Ameriprise Financial, Inc. (NYSE:AMP) manages just over $700 billion in assets and offers such products as mutual funds, life insurance policies, and annuities. The company operates through five segments, the largest of which are the Advice and Wealth Management segment and the Asset Management segment, which combine for over half of the company’s revenues, and provide full service brokerage and banking services to clients.
Ameriprise Financial, Inc. (NYSE:AMP) looks much cheaper at just 12.2 times this year’s expected earnings, but this can be deceiving. There is significant added risk and less projected growth than there is with Northern Trust. Unlike Northern Trust Corporation (NASDAQ:NTRS), which has some of the most consistent earnings history in the entire market, Ameriprise Financial, Inc. (NYSE:AMP)’s profitability has been very reactive to the health of the economy, and the company actually lost money in 2008.
Should we go bigger? Bank of America’s U.S. Trust
United States Trust Company, known as U.S. Trust, is the oldest trust company in the country and provides personal wealth management to some of the wealthiest individuals and families. Since 2007, U.S. Trust is part of Bank of America Corp (NYSE:BAC), which is a much more volatile company than either of the others listed here. As a result of exposure to bad mortgages, Bank of America was hit very hard by the financial crisis and their shareholders were diluted significantly as a result of government bailouts. The company is just barely turning a profit, but is expected to grow its earnings significantly as a result of the improving economy. If the projections are correct, Bank of America Corp (NYSE:BAC) is trading at just 9.8 times next year’s earnings (2014), but this is far from certain.
Conclusions
While Bank of America Corp (NYSE:BAC) may indeed provide the greatest growth potential of the group, it is still far too speculative (and recession-prone) to be considered as a core long-term investment. Of the other two, the defensive nature of Northern Trust Corporation (NASDAQ:NTRS) combined with their ability to grow nicely in good times as well as bad make them the clear choice.
The article Why This Company Is The Clear Choice In Asset Management originally appeared on Fool.com and is written by Matthew Frankel.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America Corp (NYSE:BAC). Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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