Strategic Shifts And Operational Efficiency Propel Future Revenue And Margin Growth

Key Takeaways

• State Street's improvements in operational leverage and margin expansion are driven by sustained revenue growth and disciplined expense management.
  
• Strategic investments and focus on operational efficiency, including operational model transformation and market opportunities like T+1 settlement, aim to enhance client retention and expand into new segments.
  
• State Street faces challenges from forex market volatility, client onboarding delays, pricing pressure, equity market concentration, and geopolitical uncertainties impacting revenue and margins.

Catalysts

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

• Sustained momentum in fee and total revenue growth alongside continued expense discipline are likely positively affecting State Street's operational leverage, pretax margin, and return on equity. This combination suggests an improvement in earnings efficiency and margin expansion.
  
• State Street's efforts in transforming and simplifying its operating model, including the successful consolidation of operations joint ventures, point toward achieving future productivity savings. This operational efficiency could positively impact net margins by reducing total operational costs.
  
• The transition to T+1 settlement has provided State Street an opportunity to enhance its client experience and value proposition, indicating potential for increased client retention and future servicing fee revenue growth, impacting overall revenue growth.
  
• Ongoing execution against strategic priorities, especially in asset services with significant AUC/A wins and servicing fee revenue wins, suggests strong business momentum. This could lead to higher servicing fee growth, bolstering future revenue.
  
• Investment in Global Advisors and the strategic investment in Envestnet highlight State Street's focus on expanding into high net worth distribution channels and wealth advisory, potentially driving management fee revenue growth by tapping into new markets and segments.

Assumptions

• Analysts are assuming State Street's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.7% today to 22.6% in 3 years time.
• Analysts expect earnings to reach $3.0 billion (and earnings per share of $9.88) by about September 2027, up from $1.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2027 earnings, down from 16.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 6.28% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

Risks

• Persistent low volatility in forex markets, specifically regarding the dollar's dominance, may restrain revenue growth opportunities within State Street's trading and FX segments.
  
• Slower-than-expected onboarding of new clients and installations, primarily tied to large clients and development partners, can delay anticipated servicing fee revenue growth, impacting overall fee income.
  
• Pricing pressure, especially from asset manager segments due to mutual fund and ETF shifts, could persist, placing downward pressure on servicing and management fee margins.
  
• Despite higher average market levels, the concentration of equity market gains in a few names and geopolitical risks may adversely affect market-related revenues, including asset management and servicing fees.
  
• The ongoing geopolitical and economic uncertainty, including rate cuts by central banks, could influence deposit levels and net interest income negatively, alongside impacting client and market activity levels.

Valuation

• The analysts have a consensus price target of $91.03 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 $103.0, and the most bearish reporting a price target of just $80.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $13.5 billion, earnings will come to $3.0 billion, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 7.8%.
• Given the current share price of $88.2, the analyst's price target of $91.03 is 3.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.