Inside Wall Street: State Street is a sharp play

The major asset-services provider to global investors remains undervalued, despite the stock's upward trek.

By Gene Marcial Mar 25, 2013 5:44PM

State Street (STT) remains very much unheralded on Wall Street, although its global business is highly familiar to both investors and investment management companies. And that’s fine with a lot of investors who have piled into the stock since 2011, when the stock traded as low as $29 a share.


The stock has since sped up and just about doubled, to nearly $60, but it isn’t expected to stop there -- as it has exceeded many of the analysts’ price targets.


"State Street’s asset servicing and asset management franchises are strong and should benefit as industry trends recover from a tough few years,” says Sonia Parechanian, analyst at S&P Capital IQ.


State Street, a bank holding company with $24 trillion of assets under custody -- yes, $24 trillion -- and $2 trillion of assets under management, is a leading servicer of financial assets worldwide. But its stock is still trading at a discount to its historical average.


“We consider State Street’s valuation attractive based on its strong capital position, share repurchase program, and sound management strategy,” says Parechanian. Rating the stock as a buy, the analyst  has a 12-month price target of $66 a share, or 15 times S&P’s 2013 earnings estimate of $4.37 a share. She estimates earnings in 2014 to rise to $4.71. State Street earned $3.95 in 2012.


State Street’s assets under management jumped 12% in the fourth quarter of 2012, helped by the stock market’s advance and new business wins. And given that the company was able to improve efficiency during a challenging 2012, “we think it has the commitment and ability to do more in 2013 and 2014,” says Parechanian.


Brian Bedell, analyst at International Strategy & Investment Group, notes the drivers are in place for State Street to start beating consensus earnings estimates in the second half of 2013 and beyond. Rating the stock a buy, he says, the macro backdrop remains materially better than management’s cautious outlook, and could drive revenue upward.


So he has earnings estimates that are higher than most analysts’ estimates: for 2013, he expects profit of $4.52, and for 2014, $5.30 a share. State Street is best positioned, he argues, in a backdrop of rising equity market, positive fund flows and steepening yield curve vs. a higher short-term rates.


“In our view, State Street is the best trust bank play to this theme for 2013 and early 2014,” says Bedell.


Part of State Street’s positive outlook is based on its broad  global reach.  Glenn Schorr of Nomura Equity Research says the company’s geographic reach, and business and product mix, position State Street well to continue to capture secular growth trends in asset servicing and management.


And at Value Line, State Street commands a rating of No. 1 in “timeliness” in the investment research outfit’s ranking system. Over the current period to the mid-decade, its earnings should  benefit from improvement in the economic climate, possible acquisitions of custody assets in Europe, and reduced costs, says Value Line analyst Theresa Brophy. Continued stock repurchases should also enhance earnings, she adds. 


In sum, “State Street is a long-term positive earnings revision story,” which has prompted us to reiterate our buy recommendation on the stock, says International Strategy’s Bedell. 

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

Tags: STT
Mar 26, 2013 6:38AM

"State Street, a bank holding company with $24 trillion of assets under custody – yes, $24 trillion – and $2 trillion of assets under management, is a leading servicer of financial assets worldwide. But its stock is still trading at a discount to its historical average."


At a time when nearly everyone on Earth knows that Central Banks and financial sector pariah are the cause and effect of ALL our woes... you promote another deadbeat delving in corruption that's holding TRILLIONS in false venues that aren't helping America or Americans in the least. Why? Tell us about the self-funded start-up that has non-college-degree'd management working beside it's workers and hires for skill, not alumni association or family ties. WE are on Earth, you and zombies like State Street are on Mars. The world will see financiers fry for all they've done.

Mar 25, 2013 10:11PM
This article is a joke, It says stocks down despite cyprus bailout. It should say stocks down because of cyprus bailout. I wonder what they will say when the S*** really hits the fan.
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