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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February 03, 2021 at 05:00PM
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