Seeking Alpha
Long/short equity, deep value, value, special situations
Profile| Send Message|
( followers)  

Three weeks ago, as we expected, State Street Corporation (STT) passed the Federal Reserve Stress Tests, along with 14 other banks, including direct peers Bank of New York Mellon (BK) and Northern Trust (NTRS). STT announced a plan to return nearly $2B in shareholder value by increasing the dividend 33% (from $.18/share quarterly to $.24/share quarterly) and repurchasing up to $1.8B in common stock. We immediately increased our fair intrinsic value per share from $50.39 to $54.63, an increase of $4.24 (8.4%). We weren't alone in our evaluation.

  • Since we increased our target price, two brokers increased STT to a Buy and one increased it to a Hold. One of the analysts who increased their rating on State Street was Dick Bove of Rochdale Securities, the influential bank stocks analyst who previously downgraded it to Neutral in January, after STT missed EPS estimates by $.01 as well as incurred $.17 in charges.


    (Click to enlarge)

    Source: Bloomberg LP

  • Also, State Street's consensus target price has increased by 6.8% during this time period ($3.17). In the last 22 days, it has increased an average of nearly $.145 a day. After reducing his target price from $49 to $42 in January after STT released EPS, Bove has increased his target price from $42 to $58, which was an increase of over 38%. In addition to our firm, State Street saw 10 increases in the target price from nine analysts, including the aforementioned Mr. Bove. Brian Bedell of ISI Group increased his target price in the last 22 days.
    (Click to enlarge)

    Source Bloomberg LP

  • Despite the one-day 6.55% decline in the stock price on January 18th, when STT failed to meet EPS expectations plus had $.17 in "non-recurring charges" and weakness coupled with volatility during the quarter in the stock, we are satisfied with our total return during the quarter. Due to State Street passing the Federal Reserve Stress Tests, the total return on STT during the quarter was 13.48, which edged the 12.59% total return of the S&P 500. STT was strongest from March 12th to March 30th, when the stress tests were concluded and that STT, BK and NTRS passed. In that period of time, STT earned a total return of 9.75%, compared to 2.82% for the S&P 500 and 6.75% for the S&P 500 Financials Sector.
    (Click to enlarge)

    Source: Bloomberg LP

  • STT's performance during this period also exceeded the trust banking peers BK (6.68%) and NTRS (6.34%), though BK (21.98%) and NTRS (20.41%) posted higher total returns for Q1 2012.
    (Click to enlarge)

    Source: Bloomberg LP

  • With strong returns in worldwide capital markets, we expect that this will more than offset flat to declining net interest margin, allowing STT to meet or exceed consensus revenue and EPS expectations of $2.328B and $.87 respectively, according to Bloomberg LP. We are surprised that the analysts have reduced these estimates during the quarter and expect that STT will exceed these excessively pessimistic expectations.

Q1 Highlights include the following:

  • European Transfer Agent of the Year- Funds Europe and ICFA European awards
  • The addition of Form PF reporting capabilities for private fund advisers to its suite of reporting tools help clients comply with the new Securities and Exchange Commission (SEC) rules impacting hedge, private equity, liquidity and other private funds.
  • Expansion of its global servicing capability for exchange traded funds (ETFs). Using cloud-enabled technology, State Street's ETF servicing solution, TotalETF, drives full ETF's lifecycle automation from the basket-creation process to trade processing and settlement. The new enhancements provide complete integration to core applications, end-to-end automation and full client transparency via an ETF dashboard available on the company's client website my.StateStreet.com. Additional functionality includes the geographic expansion of State Street's Fund Connect ETF order management system and a daily performance attribution capability for ETFs.
  • Expansion of its end-to-end derivatives solution to include an execution platform for the trading of derivatives products. The launch of this swap execution facility ((NYSEARCA:SEF)), SwapEx, coincides with the 2012 implementation of significant regulatory changes in the United States and Europe. Through State Street's comprehensive derivatives solution, buy-side clients will have a centralized means for trading, clearing and processing swap positions, managing the related collateral demands, allocating, reconciling and accounting for its positions, automating manual processes, and helping to reduce operational risk.
  • State Street received a Banking License from the Bailiwick of Jersey (British Crown Dependency) in order to provide deposit-taking services, which complement the alternative fund administration and servicing services it currently offers in Europe.
  • It launched Entity Exposure Monitor Service which calculates exposure to particular legal entities that asset managers and asset owners either do business with or have within its portfolios. Delivered through State Street's proprietary online client information delivery system, my statestreet.com, Entity Exposure Monitor Service includes state-of-the-art dashboards that investors can use to drill down into information about issuer and counterparty risk across all asset classes. It also features limit-setting and alerting capabilities that alert investors regarding over exposure to a particular legal entity. State Street's Entity Exposure Monitor Service is also designed to help provide investors with comprehensive details and advanced analytics such as exposure diversification measures and client universe comparisons.
  • State Street also announced 5 major asset servicing mandates during the quarter.
    (Click to enlarge)

    Source: State Street press releases

  • During the quarter, SSgA introduced four new ETFs in the U.S. and six new ETFs in Ireland. These Funds have a total of nearly $238M in AUM. It also looked to expand its presence in Europe despite the debt crisis because although it is number two in North America, number two globally and number one in Asia-Pacific, it only had about $2B in ETF AUM in Europe.
    (Click to enlarge)

    Source: Morningstar

You can read our full report (three part series) on State Street here:

Disclaimer: Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this report. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.

Source: State Street: A Good Reason To Be Bullish