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State Street Corp. $59 – New York symbol STT

STATE STREET CORP. $59 (New York symbol STT; Aggressive Growth Portfolio, Finance sector; WSSF Rating: Average) provides custodial, research, accounting and other services to large institutional investors, such as pension plans and mutual funds.

The company gets about 80% of its revenue from management and other fees, while the remaining 20% comes from lending.

Equity markets have slumped in the past few months and higher interest rates have cut bond prices. However, State Street’s assets under custody in the second quarter of 2006 rose 13.5%, to $10.9 trillion from $9.6 trillion a year earlier, due to new clients and more business from existing clients. Total assets under management rose 7.1%, to $1.5 trillion from $1.4 trillion a year earlier.

In the three months ended June 30, 2006, State Street earned $0.68 a share, up 3.0% from $0.66 a year earlier. If you disregard unusual items, earnings grew 40.9% to $0.93 a share. Revenue rose 21.4%, to a record $1.7 billion from $1.4 billion.

State Street now aims to expand profits by offering more alternative investment vehicles, such as hedge funds and exchange traded funds. Demand for these products is rising, and an exclusive new asset allocation computer program should give State Street an advantage over competing products.

We first recommended State Street at $35.50 in our December, 1999 issue (adjusted for splits). It got as high as $68 in 2000, but fell to $30 in 2003. It now trades at 17.6 times the $3.36 a share it will probably earn in 2006. The $0.80 dividend yields 1.4%.

The company’s long-term outlook is bright. It continues to win new clients in Europe and Asia, and should profit as more private and public pension plans outsource administrative functions to specialists like State Street. Cheaper, more powerful computers are also helping to keep its costs down.

However, its sensitivity to world stock markets increases its risk, at least in the next few months.

State Street is a hold.

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