There Is A Limited Upside For State Street Stock

[Updated 12/16/2020] State Street Update

We believe that State Street stock (NYSE: STT) has a limited upside potential of 10% in the near term. STT trades at $72 currently and has gained 9% in value year-to-date. It traded at a pre-Covid high of $79 in February and is trading 9% below that level now. Also, STT stock has gained 66% from the lows of $43 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is trading in sync with the broader markets (S&P 500 is up about 65% since March lows), as investor sentiment is positive due to recovery in its Assets under Management (AuM) and Assets under Custody / Administration (AuC/A) over the last nine months. While State Street’s AuC/A increased from $34.36 trillion at 31st December 2019 to $36.64 trillion by the end of September 2020, its AuM recovered from $3.12 trillion to $3.15 trillion over the same period.

The custody bank outperformed the consensus estimates in its recently released Q3 results. It reported total revenues of $2.8 billion – 4% lower than the year-ago period, mainly due to a 26% drop in net interest income. However, slight growth in fee income was able to partially offset the negative growth. Further, its cumulative nine months revenues were marginally higher than the previous year’s figure. The bank is heavily dependent on its asset servicing segment, which contributed around 65% to the top line in 2019 – the fees are charged as a % of AuC/A. Hence, State Street is very sensitive to volatility in asset valuations. While the bank has benefited from improvement in asset valuations and growth in asset inflows over the recent months, its net interest income has suffered due to the low-interest environment, which is unlikely to see an immediate recovery. Overall, we believe that State Street’s revenues are likely to see stagnant growth over the coming months. In view of the rally in STT stock since late March, we believe that the stock has limited upside potential in the near future. Our conclusion is based on our detailed analysis of State Street’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

[Updated 9/25/2020] State Street Stock Can Touch $79

We believe that State Street’s stock (NYSE: STT) has a strong 30% upside potential in the near term. STT trades at $58 currently and it has lost 26% in value year-to-date. It traded at a pre-Covid high of $79 in February and is 27% below that level now. Also, STT stock has gained 36% from the low of $42 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover to some extent. That said, the stock is slightly behind the broader markets (S&P 500 is up 45%), as investors are cautious about the impact of a drop in asset valuations on its asset servicing business. Despite a strong rally in STT stock since late March, we believe that the stock still has room to grow in the near future. Our conclusion is based on our detailed analysis of State Street’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 45% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how STT and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

State Street vs S&P 500 Performance Over 2007-08 Financial Crisis

STT stock declined from levels of around $56 in October 2007 (the pre-crisis peak) to roughly $21 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 63% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.

However, STT recovered strongly post the 2008 crisis to about $36 in early 2010 – rising by 73% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

State Street’s Fundamentals in Recent Years Look Strong

State Street revenues saw a growth of 13% from $10.4 billion in 2015 to $11.8 billion in 2019, mainly driven by growth in the asset servicing business. Further, the company’s net income improved from $1.8 billion to $2 billion, resulting in a strong EPS growth from $4.53 in 2015 to $5.43 in 2019. While the company’s Q2 2020 revenues were slightly higher than the year-ago period, the EPS figure for the quarter increased from $1.44 in Q2 2019 to $1.88 in Q2 2020.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Keeping in mind the trajectory over 2009-10 and because of the improvement in State Street’s stock since late March, this suggests a potential recovery to around $79 (37% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $79 level State Street’s stock was at before the coronavirus outbreak gained global momentum.

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