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Why Is State Street (STT) Up 4.2% Since the Last Earnings Report?
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A month has gone by since the last earnings report for State Street Corporation (STT - Free Report) . Shares have added about 4.2% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
State Street Beats Q4 Earnings as Trading Fees Rise
Improved trading revenues drove State Street’s fourth-quarter 2016 operating earnings of $1.48 per share, which handily outpaced the Zacks Consensus Estimate of $1.34. Also, the figure was up 22.3% year over year. The reported quarter’s operating earnings included certain notable items.
Better-than-expected results were supported by a rise in net interest income and fee income. Further, asset growth aided the results. However, a significant rise in expenses hurt the quarterly numbers.
After considering certain non-recurring items, net income available to common shareholders came in at $557 million or $1.43 per share, down from $547 million or $1.34 per share in the year-ago quarter.
For 2016, operating earnings of $5.27 per share significantly beat the Zacks Consensus Estimate of $5.11 and were above the 2015 figure of $4.89. Net income available to common shareholders (GAAP basis) amounted to $1.97 billion, up 7% year over year.
Net Interest Income Rise, Expenses High
Revenues, on a GAAP basis, totaled $2.53 billion, down marginally from the prior-year quarter. Also, the top line came in lower than the Zacks Consensus Estimate of $2.77 billion.
Revenues (GAAP basis) totaled $10.21 billion, down 2% year over year. Moreover, it lagged the Zacks Consensus Estimate of $10.71 billion.
Net interest revenue, on an operating basis, increased 7% from the year-ago quarter to $547 million. The rise was mainly driven by higher market interest rates in the U.S., disciplined liability pricing and several discrete security prepayments in the investment portfolio.
Also, net interest margin increased 7 basis points year over year to 1.08%.
Fee revenues came in at $2.20 billion, up 6% from the prior-year quarter. All components of fee income showed improvement except processing fees and other revenue.
On an operating basis, non-interest expenses were $2.14 billion, up 17.7% on a year-over-year basis. Increase in compensation and employee benefits costs, and information systems and communications expenses were partly offset by lower occupancy costs and other expenses.
As of Dec 31, 2016, total assets under custody and administration were $28.8 trillion, up 5% year over year. Moreover, assets under management were $2.5 trillion, up 10% year over year.
Strong Capital and Profitability Ratios
Under Basel III (Advanced approach), the estimated Tier 1 common ratio was 11.7% as of Dec 31, 2016, down from 12.3% as of Sep 30, 2016.
Return on common equity (on an operating basis) came in at 12.5% compared with 10.5% in the year-ago quarter.
Share Repurchases
During the reported quarter, State Street repurchased shares worth $325 million at an average price of $76.70 per share. This was part of the company’s buyback plan, which authorized the purchase of up to $1.4 billion of stock through second-quarter 2017.
Updates on State Street Beacon
Given the continued challenging environment, State Street is accelerating its multi-year plan to further digitize its operating environment and create cost efficiencies. The company announced a multi-year plan to accelerate the next phase of its transformation program aimed at generating roughly $550 million in annualized pre-tax savings by the end of 2020.
Moreover, State Street generated $175 million in annual pre-tax expense savings in 2016. The company now expects to achieve $140 million (up from $125 million targeted earlier) in annual pre-tax net run rate expense savings in 2017.
Further, State Street Beacon will improve operating basis pre-tax profit margin to nearly 31% by 2018 and 33% by the end of 2020.
In order to implement State Street Beacon, the company anticipates incurring aggregate pre-tax restructuring costs of roughly $300–$400 million over the 5-year period ending Dec 31, 2020.
Benefits from GE Asset Management Deal
Management anticipates the transaction to be accretive to operating-basis earnings for the first full-year ending Jun 30, 2017 (excluding merger and integration charges), while fee revenue from the deal is projected to be approximately $270–$300 million for the same time frame.
Notably, total acquisition and restructuring costs are expected to be roughly $80 million through 2018.
2017 Outlook
Management projects 4 year-over-year growth in fee revenue (on an operating basis), after considering the market conditions in Jan 2017, benefits from GE Asset Management and the impact of the strengthening of the U.S. dollar relative to major currencies during the fourth quarter 2016.
In addition, the company targets to generate positive fee-based operating leverage of 100-200 basis points.
Management projects net interest revenue (NIR), on an operating basis, to be in the range of $2.20–2.23 billion, assuming no change in the current interest rate environment. In case of two more rate hikes in March and September as well as continued quantitative easing in major markets outside of the U.S., NIR is expected to be in $2.27–2.30 billion range.
On the cost front, management anticipates State Street Beacon expense savings to partly offset expenses to support new business, continued business investments, and merit and depreciation increases.
In first quarter 2017, the company expects the incremental amount attributed to equity compensation expense for retirement-eligible employees and payroll taxes to be roughly $155 million, up from $122 million in the prior-year quarter.
In addition, operating-basis effective tax rate is estimated to be around 30–32%.
Preferred dividend is projected to be around $182 million.
Long Term Guidance
Management targets revenue growth in the range of 8–12% along with the EPS growth of around 10–15%. Further, return on equity is expected to be in the range of 12–15%.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.
At this time, State Street's stock has an average Growth Score of 'C', though it is doing a lot better on the momentum front with an 'A'. However, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for momentum investors than growth investors.
Outlook
While estimates have been broadly trending downward for the stock, the magnitude of these revisions is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
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Why Is State Street (STT) Up 4.2% Since the Last Earnings Report?
A month has gone by since the last earnings report for State Street Corporation (STT - Free Report) . Shares have added about 4.2% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
State Street Beats Q4 Earnings as Trading Fees Rise
Improved trading revenues drove State Street’s fourth-quarter 2016 operating earnings of $1.48 per share, which handily outpaced the Zacks Consensus Estimate of $1.34. Also, the figure was up 22.3% year over year. The reported quarter’s operating earnings included certain notable items.
Better-than-expected results were supported by a rise in net interest income and fee income. Further, asset growth aided the results. However, a significant rise in expenses hurt the quarterly numbers.
After considering certain non-recurring items, net income available to common shareholders came in at $557 million or $1.43 per share, down from $547 million or $1.34 per share in the year-ago quarter.
For 2016, operating earnings of $5.27 per share significantly beat the Zacks Consensus Estimate of $5.11 and were above the 2015 figure of $4.89. Net income available to common shareholders (GAAP basis) amounted to $1.97 billion, up 7% year over year.
Net Interest Income Rise, Expenses High
Revenues, on a GAAP basis, totaled $2.53 billion, down marginally from the prior-year quarter. Also, the top line came in lower than the Zacks Consensus Estimate of $2.77 billion.
Revenues (GAAP basis) totaled $10.21 billion, down 2% year over year. Moreover, it lagged the Zacks Consensus Estimate of $10.71 billion.
Net interest revenue, on an operating basis, increased 7% from the year-ago quarter to $547 million. The rise was mainly driven by higher market interest rates in the U.S., disciplined liability pricing and several discrete security prepayments in the investment portfolio.
Also, net interest margin increased 7 basis points year over year to 1.08%.
Fee revenues came in at $2.20 billion, up 6% from the prior-year quarter. All components of fee income showed improvement except processing fees and other revenue.
On an operating basis, non-interest expenses were $2.14 billion, up 17.7% on a year-over-year basis. Increase in compensation and employee benefits costs, and information systems and communications expenses were partly offset by lower occupancy costs and other expenses.
As of Dec 31, 2016, total assets under custody and administration were $28.8 trillion, up 5% year over year. Moreover, assets under management were $2.5 trillion, up 10% year over year.
Strong Capital and Profitability Ratios
Under Basel III (Advanced approach), the estimated Tier 1 common ratio was 11.7% as of Dec 31, 2016, down from 12.3% as of Sep 30, 2016.
Return on common equity (on an operating basis) came in at 12.5% compared with 10.5% in the year-ago quarter.
Share Repurchases
During the reported quarter, State Street repurchased shares worth $325 million at an average price of $76.70 per share. This was part of the company’s buyback plan, which authorized the purchase of up to $1.4 billion of stock through second-quarter 2017.
Updates on State Street Beacon
Given the continued challenging environment, State Street is accelerating its multi-year plan to further digitize its operating environment and create cost efficiencies. The company announced a multi-year plan to accelerate the next phase of its transformation program aimed at generating roughly $550 million in annualized pre-tax savings by the end of 2020.
Moreover, State Street generated $175 million in annual pre-tax expense savings in 2016. The company now expects to achieve $140 million (up from $125 million targeted earlier) in annual pre-tax net run rate expense savings in 2017.
Further, State Street Beacon will improve operating basis pre-tax profit margin to nearly 31% by 2018 and 33% by the end of 2020.
In order to implement State Street Beacon, the company anticipates incurring aggregate pre-tax restructuring costs of roughly $300–$400 million over the 5-year period ending Dec 31, 2020.
Benefits from GE Asset Management Deal
Management anticipates the transaction to be accretive to operating-basis earnings for the first full-year ending Jun 30, 2017 (excluding merger and integration charges), while fee revenue from the deal is projected to be approximately $270–$300 million for the same time frame.
Notably, total acquisition and restructuring costs are expected to be roughly $80 million through 2018.
2017 Outlook
Management projects 4 year-over-year growth in fee revenue (on an operating basis), after considering the market conditions in Jan 2017, benefits from GE Asset Management and the impact of the strengthening of the U.S. dollar relative to major currencies during the fourth quarter 2016.
In addition, the company targets to generate positive fee-based operating leverage of 100-200 basis points.
Management projects net interest revenue (NIR), on an operating basis, to be in the range of $2.20–2.23 billion, assuming no change in the current interest rate environment. In case of two more rate hikes in March and September as well as continued quantitative easing in major markets outside of the U.S., NIR is expected to be in $2.27–2.30 billion range.
On the cost front, management anticipates State Street Beacon expense savings to partly offset expenses to support new business, continued business investments, and merit and depreciation increases.
In first quarter 2017, the company expects the incremental amount attributed to equity compensation expense for retirement-eligible employees and payroll taxes to be roughly $155 million, up from $122 million in the prior-year quarter.
In addition, operating-basis effective tax rate is estimated to be around 30–32%.
Preferred dividend is projected to be around $182 million.
Long Term Guidance
Management targets revenue growth in the range of 8–12% along with the EPS growth of around 10–15%. Further, return on equity is expected to be in the range of 12–15%.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.
State Street Corporation Price and Consensus
State Street Corporation Price and Consensus | State Street Corporation Quote
VGM Scores
At this time, State Street's stock has an average Growth Score of 'C', though it is doing a lot better on the momentum front with an 'A'. However, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for momentum investors than growth investors.
Outlook
While estimates have been broadly trending downward for the stock, the magnitude of these revisions is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.