Mellon Bank Corp.'s controversial $1.8 billion acquisition of Dreyfus Corp. in 1993 turned the bank's stock into a laggard.
Now, however, less skeptical analysts are beginning to see it as an important element in Mellon's efforts to generate a higher price-to- earnings multiple for the stock.
At a marathon seven-hour meeting with analysts and investors in Pittsburgh last week, the bank brought out some favorable numbers.
"We're starting to see the initial signs that Dreyfus is making progress," said Anthony R. Davis, a bank analyst at Dean Witter Reynolds Inc.
Dreyfus had more than $1 billion in net equity sales in the first five months of this year, compared with $147 million in the first five months of last year, Mr. Davis said.
Part of that growth is attributable to the 11 new equity funds put in place since last October.
Mr. Davis hastens to add that the improvements at Mellon will not materially impact earnings per share.
In fact, analysts noted that the company signaled its comfort with a slight increase in Wall Street's consensus estimate of earnings per share from $5.10 to $5.15 in 1996.
"This is still a fixed-income, money market operation," said Lawrence Cohn, a bank analyst at PaineWebber Inc. "And it will be a while before the growth in the equity business starts to really have an impact on revenues or the bottom line."
Still, despite the lack of immediate effect on earnings, the progress at Dreyfus is easing lingering concerns about Mellon.
"The market has long waited to believe in the concept and own the stock," Mr. Davis said. "For those who have been skeptics, one of the bases for that skepticism is being chipped away."
The net effect of that change in perception could be that the stock will start to command a higher valuation and price-to-earnings multiple.
"Clearly, the expectations for the stock should improve as we see a greater mix toward asset management overall," said Dennis F. Shea, a bank analyst at Morgan Stanley & Co.
Indeed, Mr. Shea raised his Mellon estimate for 1996 to $5.15 from $5.10, and to $5.80 from $5.70 for 1997. Additionally, Mr. Shea raised his 12-month target price for the stock to $70 from $62.
"One of the keys to the market assigning a higher multiple is for Dreyfus to gradually shift its asset mix more toward higher fee products, such as equity, and for the mutual fund group to better participate in the industry's rapid growth," Mr. Shea said.
Merrill Ross, a bank analyst at Wheat First Butcher Singer, agreed that an important part of gaining a higher multiple is cross-selling various fee-based products.
"The execution of cross-selling opportunities is of singular importance" because returns on capital are only 13% on a stand-alone basis in the credit area, Ms. Ross said.
Mr. Davis said that the bank still needs to work on improving its cross- selling. He estimates that only 5% of Dreyfus fund sales originated in Mellon bank offices.
Mr. Cohn remains skeptical, maintaining that Dreyfus has not produced the anticipated results.
"There's no question that Dreyfus has been a disappointment as compared with the original expectations," said Mr. Cohn, who continues to have a "hold" rating on the stock.
Nonetheless, Mr. Cohn was willing to say that Mellon has a "reasonable" plan on the table to make the most of Dreyfus.
