Financial Analysis State Street State Term Paper

Excerpt from Term Paper :

This seems to have been in response to the perception of an upcoming slowdown and indicates that the firm is both cognoscent of its liquidity position and is taking steps to ensure the robustness of that liquidity position.

Moreover, in terms of cash flow coverage, State Street is in a solid position. Cash flow coverage measure the ability of the firm to pay its interest expense. In each of the past three years, State Street has generated more interest revenue than they have incurred interest expense.

Because it is difficult to separate operations and investments in a financial services firm, such as State Street, measuring the firm's operating efficiency is valuable. State Street's asset turnover is 6.7%. The gross margin was 15.1% in the past year, slightly down from the previous year. Overall, the gross margin has been steady and healthy over the past few years. If one were to separate out the interest-related activities, State Street's operating margin reveals a strong decline in the past year. Operating margin in the past fiscal year was just 2%, compared with 10.2% and 9.3% in the two years previous. State Street's cost structure has worsened in the past year. Their salary expense increased nearly 23%. A provision for legal exposure was added and the company incurred merger and integration costs. The latter pertains to a pair of small acquisitions the firm made in the past year. The acquisitions were made to access certain intellectual properties, the benefit of which have not yet been realized. Inclusive of investment activities, the operating margin is much stronger, but has remained consistently below the industry average over the past five years.

State Street has consistently carried a P/E ratio akin to a growth company within the financial services sector. Yet, dividend yield and dividend growth are significantly lower than the industry and sector averages. It is also worth noting that State Street's equity is owned by institutions at a much higher rate than comparable firms in either the sector or the industry. Moreover, State's beta indicates a greater degree of risk than in the industry as a whole. This indicates that the growth component of State is the more attractive component of the company - a higher dividend yield can be found elsewhere with less risk.

My conclusion is that I would not invest in State Street Corp at present. The stock appears best suited for the institutional investor, who wishes to incorporate a bit of growth within the industry into their portfolio. As a retail investor, I see the P/E ratio as being too high to justify such a poor yield. The financial services component of my portfolio is going to be a place where I seek to gain a healthy yield at low risk, which State Street does not give me.

The value of State Street in a well-diversified institutional portfolio is evident. Those types of investors will carry a selection of stocks within the industry and will be willing to take the higher P/E and lower yield for the opportunity to achieve growth. On the retail end, State is not enough of a growth stock to purchase for its growth potential, and clearly is poor value as a source of income.

I have no particular reservations about State's numbers. The company is liquid, and within the bounds of operational efficiency for the industry. Their financials give some cause for optimism (their growth), but they also show that the past year has seen some growing pains in the form of decreased efficiency relating to recent acquisitions. That said, the risk inherent in those acquisitions is not as great as some of the industry-wide external risks that State Street faces, such as stock market weakening and intensifying competition within the sector.

The end result is that the stock is fairly priced. There are some reasons for pessimism that I feel balance the reasons for optimism. For a stock whose value is predicated on the continuation of past strong growth patterns, this is not sufficient. Therefore I would not buy State Street Corp stock at present.

Works Cited

State Street stock information from Reuters. Retrieved April 27, 2008 at http://stocks.us.reuters.com/stocks/ratios.asp?symbol=STT&WTmodLOC=R2-Ratios-1-More

State Street Corp 2007 Annual Report. Retrieved April 27, 2008 at http://library.corporate-ir.net/library/78/782/78261/items/284296/STT_AR.pdf

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