State Street Corp.'s stock plummeted more than 7% Wednesday after the company acknowledged that its revenue growth would slow.
The decline in the rate of revenue growth stunned the market because Boston-based State Street, the biggest U.S. provider of record-keeping and other services for institutional investors, has been a standout among bank stocks and its revenue growth had been among the strongest.
David A. Spina, State Street's president and chief operating officer, told analysts and reporters in a conference call, "This is not the best environment for (revenue) generation right now."
Interest rates are very low in a number of markets around the world, making it difficult to price products, he said. Also reducing revenues are problems stemming from last year's Asian crisis. In addition, the flow of money into mutual funds has slowed, which also cuts State Street's revenues.
Mr. Spina's comments were in reply to stiff questioning by Judah S. Kraushaar, a bank analyst at Merrill Lynch & Co. Mr. Kraushaar said that, after adjustments, State Street's revenue growth has been "slowing sharply." After subtracting a $10 million nonrecurring gain out of the quarter and calculating its impact on revenue growth, he said, it would "take the better part of 2 percentage points off of your growth."
Not satisfied with the answer, Mr. Kraushaar pressed on about the company's revenue growth. Sputtering an answer, Mr. Spina replied, "I don't want to get pinned on a particular number right now."
Mr. Kraushaar downgraded State Street to long-term "accumulate" from long-term "buy."
Ruchi Madan, an analyst at PaineWebber Inc., also downgraded State Street to "neutral" from "attractive." Ms. Madan downgraded State Street in early May to an "attractive" from a "buy" because of concerns about revenue growth.
The reaction of investors was swift. Shares of State Street fell $6.0625, or 7.43%, to $75.5625.
Some analysts pointed out that the market's reaction was especially strong because the $10 million nonrecurring gain that inflated the company's quarterly earnings was not highlighted, as such items usually are in company earnings reports.
"State Street tends to give guidance in a broad sense," said Nancy Bush, bank analyst at Ryan, Beck & Co. in Livingston, N.J. "When you do that and hit people with surprises, the reaction is magnified."
Ms. Bush said she plans to maintain her "hold" rating but to reduce her 1999 estimates.
Bradley Ball, bank analyst at Credit Suisse First Boston, who has had State Street on "hold" for nine months, dropped his 1999 earnings estimate for the company to $2.90 from $2.95.
Mr. Ball said that in addition to the company's slowing revenue growth, he is also concerned about the company's operating leverage, where expense growth is keeping pace with revenue growth. The result cuts into profits, said the analyst.
Still, Mr. Ball believes that the reaction to the company was overdone.
"Management did not do a good job in guiding the street," said Mr. Ball. "And you get a knee-jerk reaction when the market is caught by surprise."
Scott Edgar, director of research at the Sife Trust Fund, which holds 300,000 shares, agreed. "State Street has a very high multiple, and those kinds of stocks tend to be very sensitive to negative news," he said. "No one is saying that the longer-term prospects of the company are in danger. State Street still is a great company."
