Why State Street’s Stock Looks Overvalued

by Trefis Team
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State Street (NYSE:STT) is a custody banking giant which provides Investment Servicing (e.g. asset servicing, foreign exchange & other trading, fund services, liquidity services, securities lending) and Investment Management service to its clients. Trefis has a price estimate of $66 for State Street’s stock, which is 10% below than the current market price. While State Street’s earnings for the third quarter were better-than-expected, with the custody bank beating both revenue and earnings expectations, we believe that its shares look overvalued keeping in mind headwinds for its investment servicing as well as investment management businesses, and its softening profit margins.

We have detailed the key components of State Street’s valuation in an interactive dashboard, along with our forecast for the full year 2019.

We Arrive At Our Estimate For State Street’s Stock Price Using 4 Underlying Factors:

Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio

Drop In Investment Servicing Segment Would Reduce State Street’s Revenues To $11.6 Billion For Full Year 2019

  • We expect State Street to report $11.6 billion in Revenues for 2019, which is 3% less than the previous year.
  • This would be driven by 3% y-o-y decrease in Investment services revenues coupled with a 5% drop in Investment Management segment.
  • The reason behind expected drop in Investment Servicing revenues is 5% decline in Asset Servicing division, driven by slight decrease in AuC/A and lower Investments Servicing & Administration Fee as % Assets under Custody.

We capture the factors that have driven changes in revenues of State Street’s segments over recent years along with our forecast for the next three years in an interactive dashboard.

 

Lower Operating Margin Will Weigh On The Net Income Figure

  • State Street is expected to report a Net Income of $2 billion in 2019, which is 15% less than the previous year. This would be driven by higher expected Tax rate and lower operating margin (down 133 bps) as compared to 2018.
  • Net Income Margin would see a decrease from 20.1% in 2018 to 17.6% in 2019, mainly driven by 3% drop in total revenues.

 

This Lends Support To A $66 Price Estimate For State Street’s Shares

  • State Street has regularly invested in share repurchases to boost shareholder returns and is expected to buyback $1.6 billion worth of shares in 2019.
  • Lower outstanding shares would partially offset the impact of drop in Net Income figure, which should result in State Street’s EPS figure decreasing to $5.83 in 2019.
  • Using an 11.4x P/E Multiple on expected 2019 EPS of $5.83, this works out to our price estimate of $66 for State Street’s Stock.

Details about how State Street’s P/E multiple compares with peers JPMorgan, BNY Mellon and BlackRock is available in our interactive dashboard.

 

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