is one of the largest trust banks worldwide, combining banking, asset servicing, and asset-management operations. They also offer foreign exchange, cash management, credit, and electronic trading, helping customers negotiate complex global financial markets. State Street Global Advisors, its asset management arm, is the world's largest institutional money manager and a leading provider of ETFs.
State Street [NYSE:STT - $43.75] is down today due to President Obama’s decision to tax large (successful) banks even further in an effort to recoup TARP funds wasted on failed institutions. While this is a negative factor the drop in STT’s share price seems to more than reflect the recent news.
STT is the largest institutional money manager with around $18 trillion in assets under custody and administration plus close to $2 billion in assets under management. They operate in 26 countries around the globe. About 70% of all revenues come from fees rather than typical banking activities.
Here are State Street’s per share numbers from continuing operations (excluding non-recurring items) as reported by Value Line:
* 2009 figures includes Zacks estimates for Q4
In order to repay TARP funds State Street issued new shares and cut the dividend rate to one cent/share quarterly. Despite the dilutive effect of the newly issued shares Zacks sees 2009 – 2010 EPS as $4.09 and $4.36 respectively.
Even after a major write-off on their portfolio holdings last year SST’s book value is near all-time record levels. If earnings estimates are on the mark 2010 could show the highest EPS ever. Custodial fees are based on the value of assets under management and the recovering market values around the world bode well for higher fee –based income going forward.
State Street announced their $2.5 billion (cash) purchase of Italy’s Intesa Sanpaolo Security Services business which will add about $501 billion in AUM to State Street’s European operations.
Value Line notes STT’s ‘earnings predictability’ at the 90th percentile ranking (with 100th being best) while also noting their ‘stock price stability’ is a low 15th percentile. I’m taking advantage of this volatility to add to my position on the current weakness. Historically, State Street has commanded a premium multiple because its fee-based income stream is less volatile and more predictable than non-custodial banks The average P/E for the nine years depicted in the chart above was 18.2x including the depressed valuation years 2008 and 2009. A rebound to even 15x this year’s expected earnings of $4.36 /share would bring STT shares back up to $65.40 or about 49% above today’s quote.
Is a $65 target price reasonable? State Street shares far exceeded that level at its peaks in 2006-2007 and 2008 – years when EPS ranged from $3.26 to $4.30. Standard and Poors gives STT their highest (5-star) rating and carry a 12-month goal price of $62 /share. They see ‘fair value’ as $51.40 or about 17.5% above this afternoon’s price.
State Street appears to be a good-quality name at a bargain price. At about 10x forward earnings I see a very favorable risk/reward.
If you’d like to play STT with options consider this trade:
If State Street rises to $50 or better (+14.3%) by Jan. 21, 2011:
· The $50 calls will be exercised.
· You will sell your shares for $50,000.
· The $50 puts will expire worthless.
· You will be left with no shares and $50,000 cash.
· You will have no further option obligations.
This best-case scenario result would be a total return of $19,500/$30,500 or + 63.9% cash-on-cash if you write the puts against marginable equity already held in your margin-type account.
What’s the risk?
If State Street remains below $50 on Jan. 21, 2011:
· The $50 calls will expire worthless.
· The $50 puts will be exercised.
· You will be forced to buy another 1000 STT shares.
· You will need to lay out an additional $50,000 in cash.
· You will have no further option obligations.
· You will end up with 2000 STT shares.
What’s the break-even on this whole trade?
On the original 1000 shares it’s their $43.75 purchase price less the $3.50 /share call premium = $40.25 /share.
On the ‘put’ shares it’s the $50 strike price less the $9.80 /share put premium = $40.20 /share.
Your overall break-even will be $40.23 /share or 8% below the trade origination price.
Summary:
State Street looks to have good upside and relatively low risk. Their shares are now trading below the lows hit at any time during 2006 – 2007 even while expected 2010 EPS are likely to be higher than ever before.
A rebound to a still lower-than-normal P/E could provide about 50% upside.
Option savvy traders who buy shares and write (sell) calls and puts for one year out could see any move up to $50 or above translate into a 63% total return even while getting an 8% ‘margin of safety’ from today’s quote.
Disclosure: Author is long STT shares and short STT options.
State Street [NYSE:STT - $43.75] is down today due to President Obama’s decision to tax large (successful) banks even further in an effort to recoup TARP funds wasted on failed institutions. While this is a negative factor the drop in STT’s share price seems to more than reflect the recent news.
STT is the largest institutional money manager with around $18 trillion in assets under custody and administration plus close to $2 billion in assets under management. They operate in 26 countries around the globe. About 70% of all revenues come from fees rather than typical banking activities.
Here are State Street’s per share numbers from continuing operations (excluding non-recurring items) as reported by Value Line:
Year | Earnings | Dividend | B/V | Avg. P/E | 52-Week Range |
2001 | 2.00 | 0.41 | 11.88 | 25.2x | 36.30 – 63.90 |
2002 | 2.20 | 0.48 | 14.73 | 20.9x | 32.10 – 58.40 |
2003 | 2.33 | 0.56 | 17.18 | 18.2x | 30.40 – 53.60 |
2004 | 2.47 | 0.64 | 18.46 | 19.5x | 39.90 – 56.90 |
2005 | 2.82 | 0.72 | 19.08 | 17.4x | 40.60 – 59.80 |
2006 | 3.26 | 0.80 | 21.81 | 19.0x | 54.40 – 68.60 |
2007 | 3.45 | 0.88 | 29.25 | 20.2x | 59.10 – 82.50 |
2008 | 4.30 | 0.95 | 25.24 | 15.0x | 28.10 – 86.60 |
2009* | 4.09 | 0.27 | 28.30 | 9.0x | 14.40 – 55.90 |
* 2009 figures includes Zacks estimates for Q4
In order to repay TARP funds State Street issued new shares and cut the dividend rate to one cent/share quarterly. Despite the dilutive effect of the newly issued shares Zacks sees 2009 – 2010 EPS as $4.09 and $4.36 respectively.
Even after a major write-off on their portfolio holdings last year SST’s book value is near all-time record levels. If earnings estimates are on the mark 2010 could show the highest EPS ever. Custodial fees are based on the value of assets under management and the recovering market values around the world bode well for higher fee –based income going forward.
State Street announced their $2.5 billion (cash) purchase of Italy’s Intesa Sanpaolo Security Services business which will add about $501 billion in AUM to State Street’s European operations.
Value Line notes STT’s ‘earnings predictability’ at the 90th percentile ranking (with 100th being best) while also noting their ‘stock price stability’ is a low 15th percentile. I’m taking advantage of this volatility to add to my position on the current weakness. Historically, State Street has commanded a premium multiple because its fee-based income stream is less volatile and more predictable than non-custodial banks The average P/E for the nine years depicted in the chart above was 18.2x including the depressed valuation years 2008 and 2009. A rebound to even 15x this year’s expected earnings of $4.36 /share would bring STT shares back up to $65.40 or about 49% above today’s quote.
Is a $65 target price reasonable? State Street shares far exceeded that level at its peaks in 2006-2007 and 2008 – years when EPS ranged from $3.26 to $4.30. Standard and Poors gives STT their highest (5-star) rating and carry a 12-month goal price of $62 /share. They see ‘fair value’ as $51.40 or about 17.5% above this afternoon’s price.
State Street appears to be a good-quality name at a bargain price. At about 10x forward earnings I see a very favorable risk/reward.
If you’d like to play STT with options consider this trade:
Cash Outlay | Cash Inflow | |
Buy 1000 STT @$43.80 /share | $43,800 | |
Sell 10 Jan. 2011 $50 calls@$3.50 calls@ $3.50 /sh. | $3,500 | |
Sell 10 Jan. 2011 $50 puts@$9.80 puts@$9.80 /sh. | $9,800 | |
Net Cash Out-of-Pocket | $30,500 |
If State Street rises to $50 or better (+14.3%) by Jan. 21, 2011:
· The $50 calls will be exercised.
· You will sell your shares for $50,000.
· The $50 puts will expire worthless.
· You will be left with no shares and $50,000 cash.
· You will have no further option obligations.
This best-case scenario result would be a total return of $19,500/$30,500 or + 63.9% cash-on-cash if you write the puts against marginable equity already held in your margin-type account.
What’s the risk?
If State Street remains below $50 on Jan. 21, 2011:
· The $50 calls will expire worthless.
· The $50 puts will be exercised.
· You will be forced to buy another 1000 STT shares.
· You will need to lay out an additional $50,000 in cash.
· You will have no further option obligations.
· You will end up with 2000 STT shares.
What’s the break-even on this whole trade?
On the original 1000 shares it’s their $43.75 purchase price less the $3.50 /share call premium = $40.25 /share.
On the ‘put’ shares it’s the $50 strike price less the $9.80 /share put premium = $40.20 /share.
Your overall break-even will be $40.23 /share or 8% below the trade origination price.
Summary:
State Street looks to have good upside and relatively low risk. Their shares are now trading below the lows hit at any time during 2006 – 2007 even while expected 2010 EPS are likely to be higher than ever before.
A rebound to a still lower-than-normal P/E could provide about 50% upside.
Option savvy traders who buy shares and write (sell) calls and puts for one year out could see any move up to $50 or above translate into a 63% total return even while getting an 8% ‘margin of safety’ from today’s quote.
Disclosure: Author is long STT shares and short STT options.
