State Street Corporation’s (STT) efficient capital deployment activities and its innovative product offerings look promising and impart it a competitive edge. The stock closed at $69.59 on Dec 17, reflecting a strong year-to-date return of 45.8%. Going forward, with consistent inorganic growth, supported by a strong liquidity position, there remain chances of price appreciation. Therefore, you may continue to hold State Street’s shares in your portfolio.
However, given a still low-interest rate environment (which may improve in the near term), deteriorating net interest margin (NIM) and stringent regulations, we discourage further addition of the stock to your portfolio.
Justifying the Stance
State Street’s third-quarter 2013 operating earnings per share of $1.19 were in line with the Zacks Consensus Estimate. Moreover, this compared favorably with 99 cents earned in the year-ago quarter.
State Street continues to enhance shareholder value through share buybacks and dividend hikes. Further, the company’s restructuring initiatives are helping to improve efficiency and boost the bottom line.
Given its robust liquidity position, State Street is well positioned to grow through acquisitions. State Street is on track to double its non-US revenues through establishment of new businesses in the European and Asia/Pacific markets and achievement of the targeted acquisitions by 2014.
However, greater dependence on fee revenues and the extensive amount of mortgage-backed and asset-backed securities in State Street’s investment portfolio keep us wary. Furthermore, despite various measures undertaken by management, rising operating costs remain a concern.
In line with our analysis, the Zacks Consensus Estimate for 2013 remained unchanged at $4.60 over the last 30 days. However, for 2014, it declined marginally to $5.20 over the same time frame. Hence, the company now carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some better-ranked banks worth considering include First Interstate Bancsystem Inc. (FIBK), Comerica Incorporated (CMA) and Fifth Third Bancorp (FITB). While First Interstate Bancsystem has a Zacks Rank #1 (Strong Buy), Comerica and Fifth Third hold a Zacks Rank #2 (Buy).
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