Expanding Low Cost ETFs And Upgrading Infrastructure Will Create Opportunity

Key Takeaways

• Expansion in low-cost ETF offerings and strategic partnerships could enhance revenue growth through increased market share and management fees.
  
• Investment in technology and disciplined expense management may improve efficiency and net margins, boosting earnings and EPS growth.
  
• Economic uncertainty and volatility, combined with rising expenses, could challenge State Street's revenue growth and margin sustainability amid a fluctuating interest rate environment.

Catalysts

Through its subsidiaries, provides a range of financial products and services to institutional investors worldwide.

• State Street's focus on expanding its ETF offerings, particularly in low-cost segments, is expected to drive revenue growth as it captures new market share, benefiting fee revenue.
  
• The strategic partnerships with firms like Apollo Global Management and Bridgewater Associates could enhance product offerings and distribution capabilities, supporting future growth in management fees.
  
• The company's investment in technology and infrastructure, including the Alpha platform, could drive efficiency and reduce costs, improving net margins.
  
• Strong year-over-year growth in FX trading services and securities finance revenues indicates robustness in fee income, which may lead to increased earnings.
  
• The plan to return about 80% of earnings to shareholders through share buybacks and dividends, coupled with disciplined expense management, can contribute to significant EPS growth.

State Street Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming State Street's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.3% today to 21.0% in 3 years time.
• Analysts expect earnings to reach $3.0 billion (and earnings per share of $11.32) by about May 2028, up from $2.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, up from 9.7x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 5.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.58%, as per the Simply Wall St company report.

State Street Future Earnings Per Share Growth

Risks

• The current global economic environment is marked by notable uncertainty due to factors such as U.S. trade policy, taxes, geopolitics, interest rates, deficits, and deregulation. This uncertainty can lead to increased market volatility, potentially impacting State Street's revenue and earnings.
  
• Despite reporting fee revenue and total revenue growth in Q1, there's acknowledgment of the potential for variability in the operating environment, which could affect State Street's ability to meet its revenue targets and sustain its margins.
  
• While State Street has shown resilience in managing expenses, there remains a risk of expenses rising due to technology and infrastructure investments, which could compress net margins if revenue growth doesn't keep pace.
  
• The company's reliance on core fee revenue growth means any changes in client behavior, such as reduced onboarding of new business or delays due to economic uncertainty, could impact the achievement of targeted revenue growth.
  
• Fluctuations in net interest income due to changing deposit mix and interest rates could compress net interest margins, creating a headwind for overall earnings in a volatile interest rate environment.

Valuation

• The analysts have a consensus price target of $101.333 for State Street based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $84.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.4 billion, earnings will come to $3.0 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 8.6%.
• Given the current share price of $90.75, the analyst price target of $101.33 is 10.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.