Higher Costs Hurt State Street (STT) Profits: Time to Sell?

State Street Corporation’s STT bottom-line growth is likely to be hurt to some extent because of continuously increasing operating expenses. Moreover, the company has been witnessing downward estimate revisions off late, indicating that analysts are not very optimistic about its earnings growth potential.

The company’s Zacks Consensus Estimate for current-year earnings has been revised 3.1% downward over the past 60 days. Thus, the stock currently has a Zacks Rank #4 (Sell).

In fact, its price performance does not seem impressive either. Its shares have lost 26.2% so far this year compared with 7.8% decline of the industry it belongs to.

Looking at the fundamentals, State Street’s operating expenses witnessed a five-year (2013-2017) CAGR of 3.6% mainly due to higher compensation and employee benefit costs as well as acquisition and restructuring costs. Despite taking cost-saving initiatives through State Street Beacon, the company’s overall expenses are likely to remain elevated in the near term, thereby, hurting profits.

Moreover, because of lower volatility in foreign exchange, the company’s trading services revenues decreased at a three-year (2015-2017) CAGR of 3.3%. While the trend reversed in the first nine months of 2018, uncertainty about the performance of the capital markets makes us apprehensive about the sustainability of the same.

Nevertheless, the company's new business wins, rising interest rates and strategic acquisitions are likely to continue supporting its profitability in the quarters ahead.

A few better-ranked stocks from the same space are Citigroup Inc. C, JPMorgan Chase & Co. JPM and U.S. Bancorp USB. Each of these companies carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Over the past 60 days, Citigroup has witnessed an upward earnings estimate revision of 1.5% for the current year. Its shares have gained 10.9% in the past two years.

JPMorgan’s earnings estimates for 2018 have been revised 1.4% upward over the past 60 days. Shares of the company have gained 36.5% in the past two years.

U.S. Bancorp’s share price has increased nearly 8.8% in the past two years. For 2018, its earnings estimates have been marginally revised upward over the past 60 days.

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