State Street Corp.'s top executive says the Boston company is approaching 2008 with the view that a year of working toward a stronger balance sheet will position it to capitalize on acquisition opportunities coming out of what could be an economic recession.
Ron Logue, the company's chairman and chief executive, said in an interview Tuesday after the company reported fourth-quarter earnings that he thinks opportunities will arise for State Street to buy once this year ends.
"We want to spend this year building our capital and making sure our infrastructure is strong so that when the market does what it has proven it will do, we can be ready to do what we do best, and this is integrating a large book of business into ours," Mr. Logue said.
"I'm not expecting [a deal] to happen this year, but I wouldn't be surprised if it occurs next year, and I want to make sure we are ready when the opportunity presents itself," he said.
Mr. Logue said during the company's earnings conference call that earnings-per-share growth this year will probably fall near the lower end of a 10% to 15% range.
"We are cautious people to begin with, and in this environment, that is the right attitude to have," he said. "There are a lot of people that are smarter than we are that are talking about a recession. So it is just prudent to plan this way. We'd rather be surprised on the upside."
In the fourth quarter, State Street said, that its net income fell 28%, to $223 million, or 57 cents a share. Excluding a one-time charge, earnings rose to $540 million, or $1.38 a share, from 86 cents a year earlier. The average estimate of analysts surveyed by Thomson Financial Inc. had been for earnings per share of $1.35 a share.
Revenue in the quarter was up 53%, to $2.48 billion. Expenses rose 40%, to $1.65 billion.
Kenneth Usdin, an analyst at the Banc of America Securities unit of Bank of America Corp., wrote that Mr. Logue's outlook implies earnings of $5 to $5.10 a share this year, below Mr. Usdin's estimate of $5.25. The average 2008 estimate of analysts in the Thomson survey was for $5.16 a share. "The low-end guidance is likely to be read as negative initially," Mr. Usdin said. "We believe the guidance looks conservative, which is not unreasonable for the company to set forth, given the market environment."
Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said State Street is well-positioned to continue growing faster than its peers because of its broad international exposure, its diversified business mix, and its market share in "higher-margin products" such as foreign exchange trading and securities lending.
State Street's international business accounted for 41% of its overall revenue last year, up from 39%.
Though he would not estimate a percentage growth figure for the international business, Mr. Logue said, "non-U.S. growth will be one of our growth engines" this year. State Street has a strong presence throughout Europe and Asia, with 6,500 employees outside the United States.
Mr. Logue has said in the past international's revenue share must reach 50% for State Street to truly consider itself a "global company" and that would require acquistion since this cannot be achieved with just organic growth.
"The winners going forward will be diversified geographically and innovative and creative in terms of product development," Mr. Logue said.
A good indication of State Street's position came this month when — after warning it would take a $279 million charge to cover investments in the subprime sector, announcing it was facing multiple lawsuits over subprime mortgage-related losses, and firing the head of its investment arm — its shares reached a 52-week high because, in the same announcement, the company said it expected 2007 earnings to exceed analysts' expectations.
Mr. Logue said during the conference call that nearly every one of State Street's revenue items grew at a double-digit rate compared to the year earlier. Assets under custody rose 29%, to $15.3 trillion, and assets under management fell 1%, to $1.98 trillion.
He said during the interview that State Street is aware of five subprime lawsuits and thinks it has properly sized its reserve to deal with these suits and any others that may crop up. "It is really a small blip compared to what others are dealing with," Mr. Logue said. "Our earnings power is very strong, and [as] an analyst [has] said, 'Earnings power trumps one-time charges.' "
