Is This Financial Company Cheap, According to Graham?

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I recently spent some time dissecting Benjamin Graham's The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.

However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I screened the stocks of the S&P 500 that met those requirements and was presented with 53 companies. I will be making a CAPScall on most of these companies after comparing them to competitors and their current value in relation to their Graham numbers. Up next is asset management firm Bank of New York Mellon (NYS: BK) .

Who are they?
Despite having the word "bank" in its name, Bank of New York Mellon operates a little differently than the bank you and I use. It focuses more on custodial services for other financial institutions and not necessarily individual depositors. That said, in the current low interest rate environment, BNY Mellon has begun to charge fees to its large banking customers to offset some costs. Nevertheless, as an intermediary amongst various financial service companies and the federal government, it is not as directly impacted by new banking regulations, giving it some room to succeed in a more-regulated environment.

What's it worth?
Looking at some other financial services companies of similar size, BNY Mellon comes out on top, especially considering that two of its peers are currently overvalued according to their Graham numbers:

Company

EPS (ttm)

Book Value Per Share (mrq)

Graham Number

Recent Price

Bank of New York Mellon$2.03$27.63$35.52$22.16
Franklin Resources (NYS: BEN) $8.59$38.31$86.05$117.42
BB&T Corporation (NYS: BBT) $1.83$24.99$32.08$28.96
State Street (NYS: STT) $3.79$38.77$57.50$41.76
Northern Trust (NAS: NTRS) $2.47$29.53$40.51$43.35

Source: Yahoo! Finance and author's calculations.

Franklin Resources, better known as Franklin Templeton Investments, is an asset management firm that offers investments to various customers, including individuals, institutions, and pension plans. Though slightly different in operations from BNY Mellon, it is of similar market cap. BB&T is one of the larger regional banks, and it is currently trading for around two-thirds of what it did prior to the 2008 financial crisis despite seeing nonperforming assets decline 38% from year end 2010.

State Street and Northern Trust, on the other hand, are BNY Mellon's chief competitors as custodial banks. State Street used job cuts and technology upgrades to save $80 million during 2011, but a 5% decline in revenue will see the company seek to cut another $170 million during 2012. Northern Trust is also feeling the pinch, expecting to cut 700 jobs as low interest rates continue to eat into profits.

Accountability time
As the most undervalued name here according to the Graham number, I will be placing a "thumbs-up" over on my CAPS page in order to track this call and keep myself accountable. I will also be adding Bank of New York Mellon to MyWatchlist to stay up to date on anything that may cause me to change my opinion of the company.

At the time this article was published Fool contributorRobert Eberhardholds no position in any company mentioned.Click hereto see his holdings and a short bio orfollow himon Twitter. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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