Should Investors Thump This Mellon?

One quarter ago, I looked at the three leaders in the financial custodial services business -- Mellon Financial (NYSE: MEL  ) , Bank of New York (NYSE: BK  ) , and State Street (NYSE: STT  ) . I came away thinking that BONY was the best value of the three, and that the market nearly saw things my way -- State Street just barely edged out BONY in terms of performance.

But of course, here at the Fool, we're not about one quarter's performance. We're ideally about helping you find solid long-term money-making ideas. And on that score, I'm starting to soften a bit toward Mellon.

While I saw a few articles paint a somewhat dour picture of Mellon's quarter, I thought it did pretty well on the whole. Adjusting the numbers for a severance package paid to the now-former CEO, and ignoring the impact of the sale of a stake in a Japanese bank, total revenue was up 18%, and income from continuing operations rose a similar amount. That's not too shabby.

Assets under management rose another 11%, to more than $800 billion, and the company boosted its assets under administration/custody by 25% to over $4 trillion. That's a ripe melon, indeed. Although the private wealth-management business was soft (management chalked this up to narrower interest spreads and spending on growth plans), the asset-management and asset-servicing businesses both had strong pre-tax income growth.

The big question now, though, is what new management will do with the business. Expenses have been increasing a little too quickly, and there are still a lot of folks who believe that the company would be better served splitting the custody and asset-management businesses. Given that the new CEO considers both units to be core to the business, I don't think a full split is very likely, although I wouldn't rule out selling specific businesses like treasury services or payment solutions.

All in all, this is a business that produces pretty good returns on equity and can throw off quite a bit of cash. That makes it intriguing to me at the right price. And while the stock might be cheaper than some pure asset managers like T. Rowe Price (Nasdaq: TROW  ) or BlackRock (NYSE: BLK  ) , I wouldn't go all the way and say the shares are cheap. Keep an eye on this one, though -- at the right price, I think it could be ripe for the picking.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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