State Street Corp.'s stock has surged since its March 15 announcement that its earnings would exceed expectations - to the point where some analysts are urging investors to pull back.
Stock in the Boston banking company "broke through $100, and we felt that was rich pricing," said Neal Epstein of Putnam, Lovell, de Guardiola & Thornton, which on Friday downgraded State Street shares to "hold" from "buy." Maitland Lammert of Edward Jones Investments, who noted the stock had risen to a multiple of 28, downgraded it a notch, to "buy" from "strong buy."
The shares have held theirground this week. They were up $2.187, or 2.31% Wednesday, to $96.75, from $66.3125 on March 14, just before State Street told analysts it expects earnings growth of more than 16% over the previous year.
Executives said the company would earn at least 86 cents a share this quarter, against 74 cents in the first quarter of 1999. Analysts surveyed by First Call had expected State Street to report earnings of 81 cents per share.
The rapid earnings growth represented a return to the norm for State Street, which was expected to post only 9% to 10% growth for the first quarter of 2000, said Stephen Biggar, an analyst at Standard & Poor's Equity Group.
State Street guided earnings expectations down in late 1999 in anticipation of slow market growth for its assets under management. Institutional investment assets were expected to grow at a weaker pace because if an influx of new funds in the market, Mr. Biggar said.
The latest guidance came just as investors were moving back into the banking sector, noted Michael Mayo, an analyst at Credit Suisse First Boston. "At a time when traditional banking is showing increased strain, State Street is viewed as safer in the banking group," he said.
State Street sold its commercial banking business to Royal Bank of Scotland PLC's Citizens Financial Group Inc. in October, and focused on its asset management and institutional investor processing businesses. It is now dedicated to pension funds, mutual funds, insurance, and investment companies, and other institutional investors.
State Street is now beginning to reap benefits from the sale of its commercial banking operation, Mr. Biggar said.
State Street's guidance indicated that its processing-oriented businesses are performing well. "They are generating a high volume of transactions, and they make money when their clients transact and when asset levels rise as they have with the markets," Putnam Lovell's Mr. Epstein said.
The company is also taking advantage of foreign exchange and trading opportunities, he added.