1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Dr. Paul Price
Dr. Paul Price
Articles  | Author's Website |

Banking on State Street Corp. [STT: $44.60 -2/18/10]

February 18, 2010 | About:
State Street Corp. is a financial holding company. State Street provides a range of products and services for institutional investors worldwide. They operate in two lines of business: Investment Management and Investment Servicing. Services include: custody, daily pricing, record keeping and administration, shareholder services, foreign exchange, brokerage, securities finance, deposit and short-term investment facilities, loan and lease financing, investment manager and hedge fund manager operations outsourcing, performance, risk and compliance analytics, investment research and investment management, including passive and active United States and non-United States equity and fixed-income strategies. As of year-end 2009 they held $18.79 trillion in assets under custody and administration and $1.91 trillion in assets under management. STT has operations in 25 nations around the world.





After posting all-time record earnings of $4.30 /share in 2008 State Street saw EPS drop to $3.46 (excluding non-recurring items) in 2009. They have fully repaid the TARP funding through share issuance and internally generated funds. After all was said and done, book value finished 2009 at its highest level ever and earnings per share (ex. non-recurring items) were the second best on record.


Here are the per share numbers from continuing operations (ex one-time charges) as reported by Value Line:




Year


EPS


Book Value


Dividend


Avg. P/E


Avg. P/BV


52-Wk Range


2000


1.82


10.09


0.35


28.9x


4.94x


31.20 – 68.40


2001


2.00


11.88


0.41


25.2x


4.22x


36.30 – 63.90


2002


2.20


14.73


0.48


20.9x


3.07x


32.10 – 58.40


2003


2.33


17.18


0.56


18.2x


2.44x


30.40 – 53.60


2004


2.47


18.46


0.64


19.5x


2.62x


39.90 – 56.90


2005


2.82


19.08


0.72


17.4x


2.63x


40.60 – 59.80


2006


3.26


21.81


0.80


19.0x


2.82x


54.4068.60


2007


3.45


29.25


0.88


20.2x


2.42x


59.1082.50


2008


4.30


25.24


0.95


15.0x


2.27x


28.10 – 86.60


2009


3.46


29.28


0.27


11.7x


1.20x


14.40 – 55.87





The dividend cut from $0.24 to $0.01 (quarterly) came as a result of the fiscal crisis of 2008- 2009. I would expect that this rate will be rapidly increased in the reasonable future.


At today’s quote of $44.60 /share State Street is now offered at< 12.9x last year’s somewhat depressed earnings and< Value Line rates STT’s financial strength as ‘B++’ and puts them in the 85th percentile for ‘earnings predictability’ (with 100th being best). Standard and Poors assigns STT an ‘ A-‘ quality ranking while maintaining their highest, five-star rating on State Street.





STT’s normalized price to book value ratio had run from 2.27x to > 4x in the nine years from 2000 through 2008. Today’s 1.52x book value level is substantially lower than typical for this high-quality stock. Year-end 2010 book value is expected to exceed $33/share and a rebound to even 2x that figure would lead to a share price of $66.


Similarly, a reversion to a more normal P/E of even 15x would bring me to a 12-month target price of $64.50 based on the $4.30 /share expected EPS for 2010. Standard and Poors now carries a (slightly more conservative) 1-year target price of $62. Even that would bring a 39% gain from this morning’s price.


State Street is a good-quality, nicely situated world leader in custodial banking and investment management. The crisis has passed and the balance sheet has been firmed up. Dividends are likely to rise significantly over the next few years. (Value Line predicts an $0.80 annual rate by 2012 – 2014).


My one-year goal of $62 - $66 leaves room for a 39% - 48% total return. That may actually turn out to be too conservative as STT shares touched highs of $$68.60, $82.50 and $86.60 in calendar years 2006-2007-2008 respectively.





If you’re well versed in option techniques you might consider this very low-risk 23-month play:






Cash Outlay


Cash Inflow


Buy 1000 STT @ $44.60 /share


$44,600




Sell 10 Jan. 2012 $55 calls @ $5.10 /share




$5,100


Sell 10 Jan. 2012 $55 puts @ $15.20 /share




$15,200


Net Cash Out-of-Pocket


$24,300







If STT shares rise to $55 or better [+ 23.3%] by the Jan. 2012 expiration date:


· The $55 calls will be exercised.


· You will sell your shares for $55,000.


· The $55 puts will expire worthless.


· You will have no further option obligations.


· You will end up with no shares and $55,000 in cash.


This best-case scenario would bring a profit of $55,000 - $24,300 = $30,700


$30,700 / $24,300 = 126.3% cash-on-cash (excluding dividends) for the approximately 23-month time horizon of this trade. Any move up of > 23.3% translates into a greater than 126% gain for those put on our buy/write combination play.





What if STT doesn’t go up to $55 by expiration date?


· The $55 calls will expire worthless.


· The $55 puts will be exercised.


· You will be forced to buy another 1000 STT shares.


· You will need to lay out an additional $55,000 in cash.


· You will have no further option obligations.


· You will end up with 2000 STT shares.





What’s the break-even point on the whole trade?


On the original 1000 shares it’s their $44.60 purchase price less the $5.10 /share call premium = $39.50 /share.


On the ‘put’ shares it’s the $55 strike price less the $15.20 /share put premium = $39.80 /share.


Your overall break-even would be $39.65 /share (excluding dividends) or $4.95 /share below our starting price. STT could fall by up to 11% without causing a loss on this trade.





Summary:


State Street looks like a good bet to see 35% - 48% total returns over the next year or so. If you’re option savvy and willing to put on a buy/write combination out to January 2012 you could see better than a 125% gain on your actual cash outlay if STT moves up by at least 23.3% over the next 23 months.





Disclosure: Author is long STT shares and short STT options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com

https://seekingalpha.com/account/research/subscribe?slug=arrow-loop-research

Visit Dr. Paul Price's Website


Rating: 3.4/5 (5 votes)

Comments

Please leave your comment:


Performances of the stocks mentioned by Dr. Paul Price


User Generated Screeners


bursaguru5Charles
HOLKLSUTop 20 Group Q3 2018 SHUT Sect
david.paige1stock%20screener%202.0
HOLKLSUEquity Income Group Q3 2018 SH
blovedayBest Backtest Results
muhua.huangmaster
mathew94Penny
mathew94Earning1Month
ralphdQuality Growth
salvatore34stock screener 2.0
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat

{{numOfNotice}}
FEEDBACK