Summary
- State Street reported Q4 earnings which beat expectations, highlighting an improved outlook compared to a more challenging first half of 2019.
- Significant efforts at reducing expenses have supported earnings despite weaker trends in revenue.
- The stock is up over 65% from its 2019 lows which we believe has largely priced in the stabilizing operation, while the challenge will be to improve top-line growth.
State Street Corporation (NYSE:STT), with a market cap of $29 billion, is a global asset manager and leader in investment servicing. Fee pressures in the asset management industry have been a recurring negative theme in recent years, largely explaining the stock price performance in STT which is down nearly 30% from its all-time high back in 2018. The company just reported Q4 earnings, highlighted by a stabilization of the operating environment supporting a more positive outlook. The stock has gained momentum in recent months, with the company benefiting from strong trends in global financial markets. This article takes a look at recent developments and our view on where STT is headed next.
(Source: finviz.com)
STT Earnings Recap
State Street reported its fiscal Q4 earnings on January 17, with non-GAAP EPS of $1.98 which was $0.29 ahead of estimates. GAAP EPS of $1.73 also beat expectations. While full-year GAAP EPS at $5.75 was down 10% compared to 2018, the story is really the improved underlying figures this last quarter compared to a more challenging first half of the last year.
(Source: Company IR, annotation by the author)
Even as servicing and management fees declined in 2019, a year-over-year increase in Q4 and sequential gain compared to Q3 support a more positive view that the operation is stabilizing, and growth can recover going forward. Total revenue of $3.0 billion in Q4 increased by 1.0% y/y, reversing a three-consecutive-quarter streak of declines. Separately, the company was successful in efforts to cut expenses, which declined by 9% y/y in Q4 driving higher margins and supporting overall profitability. Part of these efforts has been aimed at headcount reduction. Management made the following comments during the earnings conference call:
