Is State Street Stock A Buy?

State Street is a custody bank – a worldwide financial services and holding corporation with its headquarters in Boston, Massachusetts. It’s the second oldest, continuously operating banking institution in the United States. The bank’s original name was Union Bank, founded in 1792.

While headquarters are located in Boston, State Street has locations around the world. Recently, however, the company decided to close its New York offices.

Rather than ask employees to make the commute into Midtown Manhattan, State Street closed these satellite offices in August 2021 and allowed employees based in New York City to work from home or transfer to a location in New Jersey or Connecticut — effectively letting employees decide for themselves the perfect mix of at-home and in-office work. State Street is not selling the closed offices but rather subleasing to other companies.

All that aside the question is whether STT is a Buy or a Sell?

Why Does Buffett & Big Money Like Financial Stocks? 

There’s a reason why State Street and its competitors attract investment dollars from institutional capital as well as the likes of Warren Buffett’s Berkshire Hathaway (BRK.A & BRK.B), which has almost 22% invested in the financial/banking sector.

State Street revenues and earnings are predictable for the most part, and the steady cash flows and growth projections allow big money to invest with confidence.

Financial institutions aren’t going to disappear anytime soon, in spite of the challenge posed by blockchain innovations. 

What does it all mean for State Street (STT)? Is STT stock a buy right now? 

 

One of the most common metrics to understand the value of a company in relation to its earnings is the P/E, or price-to-earnings, ratio. With bank stocks, though, the P/TBV, or price-to-tangible book value is more commonly touted. This ratio measures a stock’s trading price in relation to the assets in its portfolio.

P/TBV doesn’t take into account any intangibles values but rather focuses only on the tangibles that in essence drive the bank’s earnings.

Several factors affect how much an investor is willing to pay for bank stocks. The “Buffett approach” is to focus on high-quality banks and only invest when share prices are solidly discounted in relation to historic valuations

How Does State Street Make Its Money?

State Street’s custodial side makes money from the fees charged for holding or serving the assets of larger investors, such as pensions or mutual funds. Because the company’s main revenue source is account fees, it isn’t as severely affected by fluctuations in interest rates as other banks.

On the other side of the company, State Street Global Advisors manages $2.8 trillion in assets. These assets aren’t as “loose” – fund flows don’t experience swings as volatile as other assets.

State Street’s institutional business enjoys strong worldwide clients, but the company has a limited set of products. State Street is currently focusing on ways to leverage these relationships and distribution channels by broadening its product scope.

The company is also is developing an ETF product suite in addition to growing its presence in territories outside of the United States of America, while also continuing to emphasize core product advantages.

The “cash side” of State Street’s operations depend on interest rates. 

State Street’s Most Recent Earnings

In State Street’s most recent earnings call, we learned that the company’s custodial assets went down by 2% in Q2, while service fee revenue increased by 3% YOY which was partly driven by additional new business.

Net inflow was $39 billion in Q2 thanks to cash and institutional flow increases, but net interest income fell 1%.

The company is confident in its performance thus far in the year and attributes much of it to the economy bouncing back well post-Covid.

Thanks to the boost in equity markets – a 5% jump in Q2 from Q1 – State Street has a leg up in servicing and management fees.

In Q1, the company was in a neutral position as far as new business clients and service fees, but Q2 showed that State Street has jumped into the positive quite nicely.

Speaking of management fees, the past two quarters have seen positive inflows in addition to annualized new net revenue. The company’s lending business had a good quarter as well, boosting management confidence to forecast higher guidance.

State Street’s full-year guidance bumped to 2.5% in Q2 and to 4% for YOY calculations. This confidence boost has CEO, Ron O’Hanley, calling for a 5% growth.

State Street Future Outlook

State Street’s economic forecast for the remainder of 2021:

Overall, the company’s rate view is in alignment with the existing rate curve, assuming short-end rates stay low and the yield curve steepens ever so slightly. While State Street assumes equity markets on a global scale will remain relatively flat, the company expects continued normalizing of FX activity.

Looking forward to Q3, total revenue expectations remain high, with an anticipation of 7% to 8% YOY increase. Services and management fee revenue is expected to increase 7% to 9% YOY. This means the previous expectation is likely to be surpassed by this new full-year guidance and actually to be greater than previous upper end estimates.

How Do State Street’s Expenses Look?

State Street’s confidence remains high regarding core operating cost management.

The expectation is that Q3 expenses will remain relatively flat, moving only a half-percentage point in either direction, if at all.

This comes with guidance in relation to YOY currency translation of around 1 point. Tax expectations should be around middle full-year guidance of 17% to 19%

So, Is State Street Stock A Buy?

Even in the face of a financial sector blow in the form of a pandemic and lowered prime interest rate, State Street has remained strong.

First quarter earnings grew 25% YOY and continue this upward trend. Expenses aren’t an issue.

Future guidance is positive.

Does that make this a stock you want in your portfolio? A discounted cash flow analysis forecast estimate a share price of close to $100 per share.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.