Trailing S&P500 By 14% YTD, What To Expect From State Street Stock?

State Street’s stock (NYSE: STT) has lost 5% YTD, as compared to the 9% rise in the S&P500 over the same period. Further, the stock is currently trading at $74 per share, which is 14% below its fair value of $85 – Trefis’ estimate for State Street’s valuation. 

Amid the current financial backdrop, STT stock has seen little change, moving slightly from levels of $75 in early January 2021 to around $75 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Overall, the performance of STT stock with respect to the index has been lackluster. Returns for the stock were 28% in 2021, -17% in 2022, and 0% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that STT underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including JPM, V, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could STT face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

The custody banking giant posted better-than-expected results in the fourth quarter of 2023. It reported total revenues of $3.04 billion – down 4% y-o-y, mainly due to a 5% drop in the investment servicing segment. However, it was partially offset by a 9% rise in the investment management unit. Notably, Assets under Custody & Administration (AuC/A) and Assets under Management (AuM) were $41.81 trillion (up 14% y-o-y) and $4.13 trillion (up 19%) respectively at quarter-end. On the cost front, total expenses as a % of revenues witnessed an unfavorable increase, leading to an adjusted net income of $172 million – down 57% y-o-y.

The bank’s top line decreased 2% y-o-y to $11.94 billion in FY 2023. It was mainly due to a 1% decline in the fee revenue and a drop in total other income from -$2 million to -$294 million. However, the negative impact was somewhat offset by a 9% improvement in the net interest income (NII). On the expense side, total expenses rose by 9% y-o-y over the same period. Overall, the adjusted net income decreased by 32% y-o-y to $1.8 billion.

Moving forward, State Street’s revenues are forecast to remain around $12.3 billion in FY2024. Additionally, STT’s adjusted net income margin is likely to see some drop as compared to the previous year, leading to an annual GAAP EPS of $5.51. This coupled with a P/E multiple of just below 16x will lead to a valuation of $85.

[1] Returns as of 3/21/2024
[2] Cumulative total returns since the end of 2016

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