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A Side-by-side Analysis of The Bank of New York Mellon Corporation (BK) and Johnson Controls International plc (JCI)

The Bank of New York Mellon Corporation (NYSE:BK) shares are down more than -5.83% this year and recently decreased -2.89% or -$1.51 to settle at $50.72. Johnson Controls International plc (NYSE:JCI), on the other hand, is down -10.23% year to date as of 10/10/2018. It currently trades at $34.21 and has returned -4.41% during the past week.

The Bank of New York Mellon Corporation (NYSE:BK) and Johnson Controls International plc (NYSE:JCI) are the two most active stocks in the Asset Management industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect BK to grow earnings at a 9.19% annual rate over the next 5 years. Comparatively, JCI is expected to grow at a 8.65% annual rate. All else equal, BK’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 13.42% for Johnson Controls International plc (JCI). BK’s ROI is 3.20% while JCI has a ROI of 6.90%. The interpretation is that JCI’s business generates a higher return on investment than BK’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, BK’s free cash flow was 10.65% while JCI converted 0% of its revenues into cash flow. This means that, for a given level of sales, BK is able to generate more free cash flow for investors.

Liquidity and Financial Risk

BK’s debt-to-equity ratio is 0.74 versus a D/E of 0.58 for JCI. BK is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BK trades at a forward P/E of 11.34, a P/B of 1.35, and a P/S of 9.58, compared to a forward P/E of 11.28, a P/B of 1.52, and a P/S of 1.02 for JCI. BK is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. BK is currently priced at a -14.8% to its one-year price target of 59.53. Comparatively, JCI is -14.2% relative to its price target of 39.87. This suggests that BK is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. BK has a beta of 1.03 and JCI’s beta is 0.83. JCI’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. BK has a short ratio of 3.15 compared to a short interest of 5.72 for JCI. This implies that the market is currently less bearish on the outlook for BK.

Summary




The Bank of New York Mellon Corporation (NYSE:BK) beats Johnson Controls International plc (NYSE:JCI) on a total of 7 of the 14 factors compared between the two stocks. BK is growing fastly, is more profitable, has higher cash flow per share and has a higher cash conversion rate. BK is more undervalued relative to its price target. Finally, BK has better sentiment signals based on short interest.

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