State Street Corporation (STT) reported its first-quarter 2010 results on April 20. Operating earnings for the reported quarter were in line with the Zacks Consensus Estimate. However, results were substantially down from the year-ago quarter’s earnings. Investors were clearly not moved at all by these results. As a result, the share price significantly plummeted following the earnings release.
Also, analysts covering the stock now have responded negatively as they 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 long-term outlook for the stock.
Earnings Report Review
Achieving 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 norm. A quick look at the financials reveals that State Street experienced an increase in revenues and assets under management during the reported quarter. However, there were several negatives, including higher expenses, that kept earnings under pressure.
Also, revenue growth was not as expected. While the stock market experienced a significant appreciation in the first quarter, the growth in assets under management at the company was relatively low. Additionally, servicing fees were down sequentially and net customer cash flows were modestly negative.
(Read our full coverage on this earnings report: State Street Reports In Line)
Earnings Estimate Revisions – Overview
Following the earnings release, estimates have radically moved down. The estimate revision trends and the magnitude of such revisions justify the weakness in the stock. We will now go through the details of the earnings estimate revision to substantiate why an investor would not be interested in this stock.
Agreement of Estimate Revisions
Looking at the estimates revision trends, it becomes clear that a majority of the analysts are in agreement about the weak FY2010 outlook for State Street earnings. The following table shows that 10 analysts have lowered estimates for FY2010 and only 2 have moved in the opposite direction over the last 30 days.
Also, for FY2011, 11 analysts have lowered the estimates, while no upward revision was witnessed. The higher number of downward estimate revisions for FY2010 and FY2011 indicate a likelihood of downward pressure on the performance of the stock in the near term.
Magnitude of Estimate Revisions
Estimates for FY2010 deteriorated substantially from the operating earnings of $3.43 per share to $3.15 since the earnings announcement. Also, estimates for FY2011 moved down from earnings of $3.98 per share to $3.83. The magnitude of the downward estimate revisions indicates why adding State Street to an investor’s portfolio is best avoided.
Earnings Surprise
However, the following table shows that the stock has been steady over the last four quarters with respect to earnings surprises. The average remained positive at 7.1%. This implies that State Street has surpassed the Zacks Consensus Estimate by 7.1% over that period.
Our Take
Given the ongoing turmoil in the mortgage market, we are significantly concerned about the sizable exposure of mortgage-backed and asset-backed securities in State Street’s investment portfolio, though it is diversified in its asset class. 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 it offset the volatility caused by the global economic turmoil, thereby providing buoyancy to growth in the longer term.
The estimate revision trends, magnitude of revising the estimates and higher number of downward estimate revisions clearly portray the potential for significant downward pressure on the stock over the near term.
Also, State Street shares are maintaining a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation.
Considering the company’s business model and fundamentals, we have a long-term “Underperform” recommendation on the stock.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “STT”
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