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Why an Earnings Beat is Likely for State Street (STT) in Q3?

State Street Corporation STT is scheduled to report third-quarter 2017 results before the market opens on Oct 23. Its earnings and revenues are expected to grow year over year.

Last quarter, an increase in revenues drove the company’s operating earnings growth. In fact, the number outpaced the Zacks Consensus Estimate. However, higher expenses were the downside.

State Street boasts an impressive earnings surprise history. The company’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 8.7%.

Moreover, activities of the company during the third quarter encouraged analysts to revise estimates upward. Thus, the Zacks Consensus Estimate for earnings for the to-be-reported quarter increased 1.3% over the last 30 days. Also, the figure represents a year-over-year improvement of 19.4%.

The Zacks Consensus Estimate for sales is $2.95 billion for the quarter, reflecting 12.7%  year-over-year growth.

State Street’s fundamental strength has supported a 25.5% year-to-date rally of the stock, significantly outperforming the 9.8% growth of the industry it belongs to.

State Street Corporation Price and EPS Surprise
 

State Street Corporation Price and EPS Surprise | State Street Corporation Quote

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Will the rally in stock price continue post Q3 earnings release? To a great extent, it depends on the company’s ability to maintain its trend of beating earnings estimates. Let’s take a look at what our quantitative model predicts.

A Likely Positive Surprise?

According to our quantitative model, chances of State Street beating the Zacks Consensus Estimate in the quarter are high. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — which is needed for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for State Street is +0.27%. This is because the Most Accurate estimate of $1.62 is above the Zacks Consensus Estimate of $1.61.

Zacks Rank: State Street has a Zacks Rank #2 (Buy), which increases the predictive power of ESP.

Factors to Influence Q3 Results

Improvement in Net Interest Income (NII): The Zacks Consensus Estimate for average interest earnings assets of $194.5 billion for the quarter represents a decline of nearly 3.8% year over year. Nevertheless, overall lending witnessed modest improvement in the quarter. Thus, loan growth coupled with higher interest rates is expected to boost the company’s NII.

Moreover, the company expects net interest margin (NIM) in the quarter to expand 3-5 basis points, given the Fed rate hike in June. Thus, higher NIM should further lead to an improvement in interest income.

Muted Fee Revenue Growth: In the last quarter, the company witnessed an improvement in management fees on a year-over-year basis, driven by the benefits of the acquired GE Asset Management business. We expect a similar trend to continue in the to-be-reported quarter.

However, due to seasonality, the company expects growth in trading services revenue to remain muted. Further, securities finance revenue is anticipated to decrease sequentially. Thus, overall fee revenue is not expected to witness much improvement in the quarter.

Expenses to Remain Stable: Although the benefits of the company’s cost-saving initiatives through State Street Beacon are not expected to be realized much in the quarter, the same is likely to partly offset expenses to support new business, continued business investments, and merit and depreciation increases.

Other Stocks That Warrant a Look

Here are a few other stocks you may want to consider, as according to our model, these have the right combination of elements to post an earnings beat this quarter.

Legg Mason, Inc. LM has an Earnings ESP of +0.97% and carries a Zacks Rank of 3. It is scheduled to report results on Oct 25.

Invesco Ltd. IVZ is slated to report results on Oct 26. It has an earnings ESP of +0.65% and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lazard Ltd. LAZ has an earnings ESP of +1.39% and a Zacks Rank of 3. It is also slated to report results on Oct 26.

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State Street Corporation (STT) : Free Stock Analysis Report
 
Invesco PLC (IVZ) : Free Stock Analysis Report
 
Legg Mason, Inc. (LM) : Free Stock Analysis Report
 
Lazard Ltd. (LAZ) : Free Stock Analysis Report
 
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