STT opened this morning at $40.88. So far today the stock has hit a low of $40.63 and a high of $44.93. As of 12:20, STT is trading at $41.61, up 0.38 (0.9%). The chart for STT looks neutral and S&P gives STT a 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $25 range.
After the implosion of IndyMac Bancorp (NYSE: IMB) and news of the deterioration of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) last week, there's bound to be a certain level of trepidation as the earnings crunch begins this coming week and many big financial companies report. Here's a look at what Wall Street was expecting (see The week in preview: Expectations as the earnings crunch begins for expectations of other reporting companies.)
Analysts surveyed by Thomson Financial are expecting the following of companies to report lower earnings when compared to the same period of the previous year.
Analysts surveyed by Thomson Financial expect Northern Trust Corp. (NASDAQ: NTRS) and State Street Corp. (NYSE: STT) to report profit gains in the first quarter. Both companies are scheduled to post results on Tuesday.
Northern Trust is expected to earn 95 cents per share, which is up 13% from the same period in 2007 when it earned 84 cents. The company has tended to beat quarterly estimates recently. In the third quarter of 2007, it beat the consensus estimate by 6.7%, and in the fourth quarter it beat it by 4.8%.
Chicago-based Northern Trust provides banking and trust services to the affluent and to financial institutions and corporations. In the past year, its revenues were $5.4 billion and its net income totaled $726 million. Its EPS growth forecast for the year is 9.6%, which is better than the banking industry average and the S&P 500. But the consensus recommendation of analysts is still to hold Northern Trust.
The stock has gained 11.2% in the past year and trades at a P/E of 18.37. Shares closed Friday at $67.22.
The quarter has hardly begun and, with analysts and investors watching nervously, the earnings crunch is about to begin anew. The following 11 big banks are among companies reporting results the week of April 14 to April 18.
These three are expected by analysts surveyed by Thomson Financial to be the the top performers in the first quarter, based on earnings growth from the same period of last year:
MOST NOTEWORTHY: RAM Holdings, State Street and Ericsson were today's noteworthy downgrades:
Banc of America downgraded shares of RAM Holdings (NASDAQ: RAMR) to Neutral from Buy as they believe the company could have increasing loss provisions related to RMBS and CDO exposure over the next several quarters.
State Street (NYSE: STT) was cut to Market Perform from Outperform at Keefe Bruyette on valuation and difficult comparisons in the second half of 2008.
HSBC downgraded Ericsson (NASDAQ: ERIC) to Neutral from Overweight and prefers Nokia (NYSE: NOK) at current levels.
US Bancorp reported that fourth-quarter profit fell 21%, partly due to one-time charges. The company had warned about the effects of the real estate slowdown, but it appeared to sidestep the worst of the problems plaguing other lenders. The company's CEO made it a point to explain that the nation's seventh-largest bank is "well capitalized." U.S. Bancorp's net income fell to $942 million, or 53 cents per share, from $1.19 billion, or 66 cents per share, year over year. Analysts surveyed by Thomson Financial had expected profit of 59 cents per share.
State Street reported Tuesday that fourth-quarter earnings fell 28% after the company took a charge to cover fallout from its subprime investments. Excluding the charge, earnings rose to $540 million, or $1.38 per share, from 86 cents per share last year. Analysts polled by Thomson Financial, whose estimates excluded one-time items, had expected earnings of $1.35 per share. Revenue rose 53% to $2.48 billion from $1.62 billion in the same period last year. Analysts had expected revenue of $2.39 billion.
Thomson Financial expects State Street Corp. (NYSE: STT) to earn $1.31 when it announces its fourth-quarter earnings on January 15th. That's 56% above the same period in 2006, when it earned $0.84.
State Street is a Boston-based bank operating in two lines of business: investment servicing and investment management. In the last year, its revenues were $5 billion and its net income totaled $1.3 billion. Its stock has gained 20% of its value in the last year, and it trades at a P/E of 21.8.
It has a strong track record of exceeding expected earnings. In the second quarter of 2007, it beat by 5.9% and in the third quarter it beat by 22.3%. My hunch is that it will beat again.
Update. I was way off on State Street. It reported a 28% decline in EPS to $0.57. The problem was legal costs for subprime mortgages of $618 million. State Street said 2008 growth will be at the lower end of its target ranges, sending the shares down as much as 8%. On the plus side, State Street beat the $1.35 average EPS estimate -- excluding one-time charges -- of 15 analysts surveyed by Bloomberg by three cents a share. But the lower guidance is killing the stock.
State Street Corp. (NYSE: STT) has set aside $618 million to cover the legal costs of its bad subprime mortgage bets. It's already taken a $279 million charge to cover those legal costs.
This is a unique twist to the damage caused by the subprime mortgage meltdown. Rather than taking a charge to write-down the value of securities backed by subprime mortgages, as many banks have done, State Street is facing massive lawsuits charging that the money manager's subprime investment bets were at odds with the intent of its customers -- fixed income investors.
State Street was competing for assets by trying to increase the yield on its bond funds. To do that, it bought subprime mortgage-backed securities that promised higher yields at low risk. But it turned out that the higher yields came with higher risk. This higher risk is not what State Street's clients thought they were buying.
If you own a bank stock, you know how brutal the stock market can be. Many are down more than 50% as the subprime mortgage mess continues to shock all investors. But some banks are being punished for being a bank, not for mortgages they don't even own.
Not all banks are the same. Most banks make mortgage loans to several different kinds of buyers for different types of properties: existing homes, new construction, and/or commercial buildings. Or they only make loans to well-qualified buyers, ones with good income and high FICO scores (your credit score). Still others make no mortgages at all, have a diversified revenue stream and are only guilty of being called banks. Finally, there are banks that have a large percentage of their revenues from international lending. Smart investors will look for all of these types and start investing a small amount in several of them, then wait for the rally that will inevitably come.
TheStreet.com's Jim Cramer says there's a shocking disparity in risk management between the pros and the bush leaguers -- and which proved to be which here.
Last month we had a raid on State Street, a vicious raid that implied that its conduits, its structured vehicles (basically partnerships it set up for clients) could blow up in the company's face causing billions in losses.
Citigroup has roughly the same kind of partnerships. They were set up to securitize mortgages and sell them to money funds and the like. Given that both have considerable exposure to these kinds of conduits the thought was that both could be crushed by them, but that State Street, given its smaller base of business, could be annihilated.
Having followed State Street for years, and covered some of the accounts there, I was blown away at the insinuations. This is a great bank with phenomenal risk controls. When I called up there to check with my sources I got a clean bill of health and said so on TV, making a point that this was not any old stupid bank but a well-run one that was just being targeted by the shorts for a quick profit.
A contract awarded to American Superconductor Corporation (NASDAQ: AMSC) by the Department of Homeland Security wasn't put out for bid as is usually required, and is being investigated by the House's Committee on Energy and Commerce, as well as the Subcommittee on Oversight and Investigations, reported the Wall Street Journal (subscription required).
The Wall Street Journal reported that private equity firm The Carlyle Group has been forced to lend a second $100M to mortgage fund Carlyle Capital, which has cancelled its dividend and is selling assets to meet margin calls, just two months after listing on the Euronext Amsterdam.
U.S. consumers are defaulting on credit-card payments at a significantly higher rate than last year, raising the prospect that the problems in subprime mortgages will spread to other types of consumer debt, reported the Financial Times (subscription required).
Barclays plc (NYSE: BCS) set up a $3B structured finance vehicle on behalf of German bank Sachsen less than three months before Sachsen's recent collapse, reported the Financial Times, which added that the finance vehicle set up by Barclays for the German bank had most of its assets invested in securities backed by prime and subprime U.S. mortgages.
OTHER PAPERS:
According to regulatory filings, State Street Corporation (NYSE: STT) has the most exposure to asset-backed commercial paper among European and American banks, the U.K. Times reported.
MOST NOTEWORTHY: Lear Corp (LEA) and Tellabs Inc (TLAB) were today's most notable upgrades:
Lear Corp (NYSE: LEA) was upgraded to Neutral from Underperform at Credit Suisse following the $2.31B cash bid from Carl Icahn.
Merrill Lynch upgraded Tellabs Inc (NASDAQ: TLAB) to Buy from Neutral, citing expectations for an improvement in cross-connect demand and margins; the firm expects Tellabs to benefit from AT&T's (NYSE: T) new broadband initiatives, a demand recovery at Cingular, T-Mobile 3G deployment plans and an increase in Sprint/Nextel (NYSE: S) base stations.
OTHER UPGRADES:
JP Morgan upgraded Nvidia Corp (NASDAQ: NVDA) to Overweight from Neutral based on expectations for gross margin upside to be driven by improved unit costs and market share gains in the notebook segment.
Raymond James upgraded shares of AirTran Holdings Inc (NYSE: AAI) to Outperform from Market Perform with a $14 target.
CIBC upgraded Kronos Inc (NASDAQ: KRON) to Sector Outperformer from Sector Perform, with a $46 target, as they find valuation attractive at current levels given their increasing confidence operations are improving.
State Street Corp (NYSE: STT) was upgraded to Equal Weight from Underweight at Morgan Stanley following the news of the Investors Financial Services Corp (NASDAQ: IFIN) acquisition.
Triad Hospitals Inc (NYSE: TRI) was upgraded to Neutral from Sell at Bank of America.
Overstock.com Inc (NASDAQ: OSTK) was upgraded to Neural from Sell at First Albany, as the worst is already reflected in the stock's valuation.
Matrix USA upgraded Estee Lauder Co Inc (NYSE: EL) to Hold from Sell based on fundamental trends.
This morning, The Bank of New York Company (NYSE: BK) announced the $16.8 billion stock acquisition of Mellon Financial Corporation (NYSE: MEL). Combined, the companies will have about $12.5 billion of annual revenue, rank first worldwide with more than $16 trillion of assets under custody, and rank in the top 10 with more than $1.1 trillion of assets under management.
The BK/MEL deal makes sense because securities processing -- managing the paperwork and information flows between buyers and sellers of stocks and bonds and all the parties in between -- is a scale sensitive business. In other words, the bigger you are, the lower are your costs to process a transaction. And the lower your unit cost, the more leeway you have in price cutting to win lucrative contracts.
The stock market appears to like the deal -- BK is up 8.4% and MEL has risen 5% in pre-market trading. Usually the acquirer's stock drops on such announcements so this is an unusual vote of confidence.
This deal is likely to spur more such deals and State Street Corporation (NYSE: STT) and Northern Trust Corporation (NYSE: NTRS) are two of the most likely merger candidates. STT has $11.3 trillion in assets under custody -- $8 trillion more than NTRS's $3.3 trillion. STT could acquire NTRS since its $20 billion market capitalization is $8 billion more than NTRS's.
State Street (NYSE: STT - option chain) shares are moving higher today despite the markets being in the toilet again. This could be because STT is one of the companies that are getting cash from the government. STT will receive a $2 billion cash injection from the federal government in return for non-voting senior preferred stock. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on STT.
After the implosion of 
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Ted Allrich is the founder of 
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Waiting for the other shoe to drop: The looming credit crisis
Closing Bell: Dow down 7.7%; GE, YHOO, MS fall, PGI, MNT soar
Bet on T&A with J&J (JNJ)
