State Street: Earnings Scorecard – Analyst Blog

State Street Corporation (STT) reported its second-quarter 2010 results on July 20. Operating earnings for the reported quarter were in line with the Zacks Consensus Estimate. However, investors were clearly not buoyant with these results. As a result, the share price plummeted following the earnings release.

 

The overall response has been negative with respect to estimate revisions over the last 7 days as analysts covering the stock had sufficient time to absorb and consider the near-term fundamental downsides.

 

Let’s now cover the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short term and the long term outlook for the stock.

 

 

Achievement of the estimates should be a positive for the stock price and this inspires optimism for a stable future. But the stock price did not follow this thumb rule. A quick look at the financials reveals that State Street experienced an increase in revenues and assets under management during the reported quarter. State Street’s recent acquisitions – Intesa in mid-May and the Mourant in early April – contributed to the results. However, there were several negatives including higher expenses that kept earnings under pressure.

 

While the stock market experienced a significant appreciation in the second quarter, the growth in assets under management of the company was relatively low.

 

(Read our full coverage on this earnings report: State Street Reports In-Line)

 

 

Following the earnings release, estimates have moved slightly down. The estimate revision trends and the magnitude of such revisions justify a slight weakness in the stock. We will now go through the details of the earnings estimate revision to substantiate why an investor would not be very interested in this stock in the near term.

 

 

One of the total 17 analysts covering the stock has lowered estimates for the third quarter and full year 2010, while no upward revision was witnessed over the last 7 days. The majority of the analysts have not revised their estimates following the earnings release.

 

 

Estimates for the third quarter of 2010 remained unchanged at 83 cents since the earnings announcement. However, estimates for 2010 deteriorated only by a penny from the operating earnings per share of 86 cents to 85 cents since then. The magnitude of the downward estimate revisions indicates why adding State Street to an investor’s portfolio at this point is best avoided.

 

 

However, the stock has been steady over the last four quarters with respect to earnings surprises. The average remained positive at 4.1%. This implies that State Street has surpassed the Zacks Consensus Estimate by the same magnitude over that period.

 

 

Given the ongoing turmoil in the mortgage market, we are significantly concerned about the sizable amount of mortgage-backed and asset-backed securities exposure in State Street’s investment portfolio, though it is diversified with respect to asset classes. We expect impairment charges on these exposures to negatively impact the company’s financials in the near future.

 

However, we believe that prudent cost control and strong regulatory capital ratios along with well-off core servicing and investment management franchises will help offset the volatility caused by the global economic turmoil, thereby providing buoyancy to growth in the longer term. Also, the recent acquisitions are expected to reinforce State Street’s core asset servicing business.

 

The estimate revision trends and the magnitude of revising the estimates portray no clear directional downward pressure on the stock over the near term.

 

State Street shares currently maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

 

Also, considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.