Mellon Financial

Trading at $21.40 as of Feb. 10, 2003

Love may be blind, but it needn't be stupid. I'm in love (and I put it that way for the purposes of this Fool special only) with Mellon Financial(NYSE: MEL). Not the people who work there. People -- blech! I'm in love with the stock. The thing is, the stock is bruised. It could even be considered unsightly. It might need self-help books or a shrink, because it has had problems. Since 2002, the stock has let itself go, losing 40%.

However, like the girl with glasses and braces playing the brooding wallflower, if you really get to know her (and take off the braces, at least), you might have a... uh... good investment on your hands. (I dropped the ball on that metaphor.) Anyhoo, I think Mellon is a good thing. (How's that for wordplay?) I'm thinking the 40% decline spells "fat buying opportunity."

Asset management firm Mellon owns Dreyfus Funds and manages large accounts for corporate and wealthy clients, among other financial services. The company has $2.3 trillion under administration, custody, or management, and $580 billion under management. (Yeah, it's buying dinner. I ain't.)

Fee-based income accounts for 85% of revenue and reached $3.6 billion in 2002, up from $2.7 billion in 2001. Last year, Mellon earned $1.55 per share, achieved a strong return on equity of 19.9%, and maintained book value of nearly $8.

At a recent $23 per share, Mellon trades at 2.9 times book value -- and book value matters for financial stocks. This multiple is well below the stock's long-term average of around 3.5 to 4 times book. Plus, the stock's at 14.8 times trailing earnings per share and 12.9 times 2003 estimates of $1.77. Its average P/E the last 10 years was around 18.

To my eyes, today's price makes Mellon look like a safe long-term date. The downside is a "Richie" rather than "Fonzie" type risk, and the upside might be a long-term commitment that makes you steadily richer.

So, why is the stock beaten down? You've probably noticed that it hasn't been a great few years for investors. Being an investment business, Mellon has suffered, too. Yet, its nonperforming assets last year were a mere $59 million, or 0.7% of loans. It has weathered the storm well.

If Mellon gets back on track and can grow net income about 11% annually again (11% is expected this year, after a decline last year), then its 12.9 forward P/E will likely expand to the high teens.

Investors buying now are buying for the better economic times that should eventually return. Given its low valuation multiple (which decreases downside risk as we wait for things to turn around), its century-old staying power, and its proven abilities, I think Mellon is an investment worth at least flirting with, if not courting.

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