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What's in the Offing for State Street's (STT) Q3 Earnings?

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State Street (STT - Free Report) is scheduled to report third-quarter 2018 results on Oct 19, before the market opens. Its earnings and revenues are expected to grow year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results were aided by an increase in revenues, partly offset by higher expenses.

Moreover, State Street boasts an impressive earnings surprise history. The company’s earnings have surpassed the Zacks Consensus Estimate in all the trailing four quarters, with an average beat of 4.4%.

State Street Corporation Price and EPS Surprise

State Street Corporation Price and EPS Surprise | State Street Corporation Quote

However, activities of the company during the third quarter failed to win analysts’ confidence. Thus, the Zacks Consensus Estimate for earnings for the to-be-reported quarter have moved 3.1% downward over the past 30 days. Nonetheless, the figure represents a year-over-year increase of 9.9%.

The Zacks Consensus Estimate for sales is $3.00 billion for the third quarter, reflecting 5.6% year-over-year growth.

Despite robust fundamentals, the company’s price performance does not seem impressive. Its shares have lost 16.3% in the past year, against 0.5% growth recorded by the industry.

Can the price performance improve post Q3 earnings? It depends on whether the company will be able to maintain its trend of beating earnings estimates.

Before we take a look at what our quantitative model predicts, let’s check the factors that are expected to impact Q3 results.

Factors at Play

Stable Net Interest Income (NII): The Zacks Consensus Estimate for average interest earning assets of $185.6 billion for the third quarter represents a marginal decline from the prior quarter. Moreover, overall lending activities were also not very impressive during the quarter. Nevertheless, driven by modest loan growth along with the benefits of higher interest rates, State Street’s NII is likely to either remain stable or witness modest improvement.

Management expects momentum in NII growth to continue in the third quarter, owing to higher rates.

Muted Fee Revenue Growth: State Street has been continuously investing in new products and business wins. However, despite relatively stronger equity markets, the company’s servicing fee is not expected to witness significant improvement because of the estimated impact of the removal of additional assets under custody from Blackrock.

Moreover, because of a sequential slowdown in volatility during the third quarter, growth in trading revenues is also likely to remain muted. In fact, while foreign exchange volatility increased marginally during the quarter, foreign exchange trading volumes declined sequentially (mainly due to seasonality). Thus, because of lower volumes, foreign exchange trading revenues are likely to decline during the to-be-reported quarter.

Further, the amount of securities on loans declined sequentially during the third quarter because of relatively lower equity trading volumes and the negative impact of seasonality. Moreover, the spread between the three-month LIBOR and the Fed funds rate also contracted. Thus, because of narrower spreads and lower volumes, securities lending revenues are likely to decline sequentially during the third quarter.

Stable Operating Expenses: State Street’s expenses have remained elevated over the past few years due to rise in compensation and employee benefit costs as well as acquisition and restructuring costs. Owing to its continuing restructuring efforts, costs are likely to remain elevated. However, the State Street Beacon expense savings are likely to offset the rise to some extent during the quarter.

Now, here is what our quantitative model predicts:

According to our quantitative model, it cannot be conclusively predicted whether State Street will be able to beat the Zacks Consensus Estimate in the third quarter. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for State Street is 0.00%.

Zacks Rank: State Street currently has a Zacks Rank #3. While this increases the predictive power of ESP, we also need a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are a few finance stocks you may want to consider, as according to our model, these have the right combination of elements to post an earnings beat in the to-be-reported quarter.

Ameriprise Financial, Inc. (AMP - Free Report) is slated to release results on Oct 23. It has an Earnings ESP of +4.30% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

T. Rowe Price Group, Inc. (TROW - Free Report) is scheduled to release results on Oct 25. It has an Earnings ESP of +0.78% and a Zacks Rank #2.

Ally Financial Inc. (ALLY - Free Report) has an Earnings ESP of +0.50% and a Zacks Rank of 3. The company is also slated to release results on Oct 25.

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