The numbers: cheap or expensive?
State Street is expected to report earnings of $4.53 for the 2013 fiscal year, an increase of 14.7% from 2012 on a combination of 10% growth in assets under custody and improved operating efficiency. If State Street meets expectations, that means that shares are currently trading for 14.8 times current year earnings. The company is projected to grow its EPS to $5.19 and $5.96 in fiscal years 2014 and 2015, respectively. These figures correspond to a three-year average forward earnings growth rate of just less than 15%, which is a fantastic sustained growth rate for any company, especially one with such a low P/E like State Street. Before we go diving in, let’s check out a couple of alternatives.
Alternatives: BlackRock, Inc. (NYSE:BLK) and Franklin Resources, Inc. (NYSE:BEN)
BlackRock is another leading investment management company, with a total of $3.9 trillion in assets under management. BlackRock specializes in fixed-income and equity funds, which it offers to both institutional and individual investors. The company’s business model is slightly different than State Street’s and is oriented more toward investment management and less toward the investment servicing side of the business, like State Street is known for.
BlackRock trades at a P/E of 17.1 times this year’s projected earnings and is projected to grow at a slightly slower, but still impressive, rate of 11% annually going forward. It is also worth noting that BlackRock is a better dividend payer, with a yield of 2.5% annually, as opposed to 1.57% from State Street.
Franklin Resources also generates most of its revenue by investment management, with one major difference. The company is highly dependent on the strength (or lack thereof) of the U.S. dollar, with 55% of assets invested internationally. Analysts are somewhat cautious about the company’s earnings growth over the next few years, as the rising U.S. dollar could be bad news for investments held in other currencies. This is offset by the company’s low debt and high cash reserves, which are among the best in the business.
Franklin Resources trades at the “cheapest” valuation of the three, at just 14 times this year’s earnings, and is projected to grow its earnings very nicely, at a 12% rate over the next several years. However, bear in mind that the risks related to the company’s international investments may be the reason for this “discount.”
Buy, sell, or hold?
If you are currently a State Street Corporation (NYSE:STT) shareholder, there is absolutely nothing wrong with cashing in at least some of your position and taking profits. Having said that, State Street has a very profitable business model, and the combination of increasing assets under management due to its ETF offerings, as well as its ambitious international expansion plans, should provide shareholders with even better gains over the next several years and beyond.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends BlackRock.
The article This Financial Is One of the Best Bargains in the Industry originally appeared on Fool.com.
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