State Street Corp. (STT: 36.25 -0.38 -1.04%) said on Wednesday that it expects to report second quarter 2010 operating earnings of 93 cents, which would easily beat the Zacks Consensus Estimate of 72 cents.Operating earnings for the quarter exclude a one-time tax benefit of $180 million or 36 cents per share due to the restructuring of former non-U.S. assets and a special tax charge of $251 million or 50 cents per share for financially supporting trust funds under its management.
The expected operating results include about $48 million of net losses related to investment securities and a provision for credit losses of about $10 million. Operating revenue for the upcoming quarter is expected to be $2.2 billion.
Including these non-recurring items, State Street expects to report a net income of 87 cents per share on revenues of $2.3 billion.
Investors were clearly very encouraged by this guidance. As a result, the shares of State Street soared following the earnings release. The share price of State Street increased 9.9%, or $3.29, to close at $36.63 on the NYSE.
However, analysts covering the stock have not responded positively yet. They will take some time to absorb these expected results and consider the fundamentals.
The share prices of competitors Bank of New York Mellon (BK: 25.85 -0.47 -1.79%) and Northern Trust (NTRS: 47.74 -1.40 -2.85%) increased by more than 6% on State Street’s guidance announcement yesterday.
State Street is scheduled to release its second quarter 2010 results on July 20.
Given the ongoing turmoil in the mortgage market, we are significantly concerned about the sizable exposure of mortgage-backed and asset-backed securities in State Street’s investment portfolio, though it is diversified in its asset class. We expect impairment charges on these exposures to negatively impact the company’s financials in the near future.
However, we believe that prudent cost control and strong regulatory capital ratios along with robust core servicing and investment management franchises will help it offset the volatility caused by the global economic turmoil thereby, providing buoyancy to growth in the longer term.
State Street currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
However, considering the company’s business model and fundamentals, we have a long-term “Underperform” recommendation on the stock. We will keep an eye on the upcoming results to take a decision about upgrading the current rating.
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