State Street Stock Is Up 19% YTD, Is It Overpriced?
[Updated 03/31/2021] State Street Update
Having gained close to 100% since the March 23 lows of last year, at the current price near $86 per share, we believe State Street’s stock (NYSE: STT) is slightly overpriced. State Street, the custody banking giant, has seen its stock increase from $43 to $86 off the March 2020 bottom compared to the S&P 500 which gained almost 75% – the stock is leading the broader markets and is trading 7% above its pre-Covid-19 peak in February 2020. The stock has enjoyed positive investor sentiment – up 19% YTD, as the U.S Treasury bond yields saw some recovery over the recent months. The same was the case with other major U.S banks, which is also evident from a 25% YTD gain in the banking sector benchmark, Dow Jones U.S. Banks Index. The yield on the benchmark 10-year Treasury note touched 1.776% on 30th March – a 14 month high.
Although the company reported an earnings beat in the recently released fourth-quarter 2020 results, its total revenues declined by 4% y-o-y to $2.9 billion. Further, it reported a marginal decline in the full year 2020 revenues to $11.7 billion, primarily driven by a 14% y-o-y decrease in the net interest income due to lower market rates, offset by a 4% growth in fees revenue. This growth in fees revenue was driven by a 23% y-o-y jump in trading services, a 6% increase in management fees, and a 2% growth in servicing fees led by higher average market levels and client activity.
The asset management industry, especially in the exchange-traded-funds (ETF) segment, is facing a stiff price war, with market leaders like BlackRock, Vanguard, and State Street fighting to keep their management fees to a minimum. In the recent development and just after BlackRock’s announcement to cut fees on nine of its US equity style investing ETFs, State Street has announced it will reduce fees on two of its bond ETFs. This move is likely to boost asset growth for State Street, compensating for the low fees – the bank had $38.8 trillion in Assets under Custody & Administration (AuC/A) and $3.5 trillion in Assets under Management (AuM) by the end of December 2020. That said, the interest rates are unlikely to see an immediate recovery to the pre-Covid-19 levels. Further, although the investment yields have improved in recent months, their long-term sustainability in the current scenario is a concern. Overall, we expect State Street revenues to remain around $11.5 billion in FY2021 – slightly below the 2020 figure. Additionally, STT’s P/E multiple changed from around 10x in 2018 to just above 11x in 2020. While the company’s P/E is just below 14x now, this leaves some scope for downside when the current P/E is compared to levels seen in the past years – P/E multiple of around 13x at the end of 2019 and just above 11x in 2020. Our dashboard “What Factors Drove 37% Change In State Street Stock Between 2018-End And Now?” provides the key numbers behind our thinking.
[Updated 02/02/2021] More Upside For State Street Stock?
After around a 63% gain since the March 23 lows of the last year, at the current price of $70 per share, we believe State Street Stock (NYSE: STT) has more room for growth. State Street, the custody banking giant, has seen its stock rally from $43 to $70 off the March 2020 bottom compared to the S&P which moved around 70% – the stock is slightly behind the broader markets and has lost 7% over the last 12 months. While the company reported an earnings beat in the recently released fourth-quarter 2020 results, its total revenues declined to $2.9 billion – 4% lower than the year-ago period, mainly driven by a 22.5% drop in net interest income. The net interest income suffered due to the lower interest rate environment, which is the main reason behind cautious investor optimism towards the stock.
State Street’s stock has partially reached the level it was at before the drop in February 2020 due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential as its valuation implies it has further to go.
State Street’s revenues rose around 4% from $11.3 billion in 2017 to about $11.7 billion in 2020, primarily due to positive growth in the investment management business. It translated into a 14% increase in the adjusted net income figure, improving the net income margin from 17.5% in 2017 to 19.3% in 2020. Notably, Net income suffered in 2017 due to the one-time impact of the U.S Tax Act.
While the company has seen a rise in EPS over 2017-2020, its P/E multiple has decreased. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard “What Factors Drove 28% Change In State Street Stock Between 2017-End And Now?” has the underlying numbers.
State Street’s P/E multiple has changed from just below 19x in FY 2017 to just above 11x in FY 2020, and the company’s P/E is close to 11x now. This leaves some space for upside when the current P/E is compared to levels seen in the past years – such as a P/E multiple of around 13x at the end of 2019.
So Where Is The Stock Headed?
State Street reported $11.7 billion in the full year 2020 revenues – marginally lower than the 2019 figure. It derives a big chunk of its revenues from asset servicing fees (44% in 2020), which are charged as a percentage of Assets under Custody & Administration (AUC/A). The bank had $38.8 trillion in AuC/A by the end of December 2020 – 13% more than the figure of $34.36 trillion on 31st December 2019. Similarly, its Assets under Management (AuM) improved from $3.12 trillion to $3.5 trillion over the same period – up by 11% y-o-y. It enabled the bank to report a 4% y-o-y growth in its fees income, almost offsetting the weakness due to lower net interest income. We expect the fees income to further increase in the subsequent quarters. Further, State Street is expected to restart its share repurchase program in the first quarter of 2021, which will boost shareholder returns. Overall, the above factors are likely to benefit the State Street Stock in the near term.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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