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Should You Buy Goldman Sachs (GS) Stock Ahead of Earnings?

Ryan McQueeney
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Shares of Goldman Sachs GS gained as much as 1.2% in early morning trading Monday, just one day before the investment banking behemoth is scheduled to release its latest quarterly earnings results. Investors will hope Goldman’s results continue the strong trend for the finance sector, with commercial banks like JPMorgan Chase JPM, Citigroup C, and Bank of America BAC already impressing.

Bank of America rounded out the major consumer & investment hybrid banks with its new report on Monday morning. The company posted better-than-expected earnings and total revenue growth of 4%. These results were buoyed by 38% growth in equity trading income.

Bank of America’s strong equity trading revenues echoed a similar trend witnessed by JPMorgan and Citigroup, which reported revenue growth of 26% and 38%, respectively, in this segment. It appears that fresh volatility in global stock markets has inspired busier activity in these divisions.

But what should Goldman Sachs investors expect to see on Tuesday morning? Let’s take a closer look.

Latest Outlook and Valuation

Based on our latest Zacks Consensus Estimates, we expect Goldman Sachs to report earnings of $5.67 per share and revenue of $8.89 billion. These results would represent year-over-year growth of 10.1% and 10.7%, respectively. It is worth noting that Goldman’s earnings estimates have trending higher recently, adding about 26 cents within the past month.

Of course, earnings and revenue are just two of the many things investors will be concerned with when Goldman reports on Tuesday. We can also turn to our exclusive non-financial metrics consensus estimate file to prepare.

The Zacks Consensus NFM file contains detailed estimate data for business segment metrics and non-financial metrics reported by companies. The data is acquired from digest and contributing broker models and includes the independent research of expert stock market analysts.

According to these consensus estimates, Goldman is on track to post revenue of $1.81 billion in its Institutional Client Services, Total Equities segment. This would mark growth of 8.4% year over year. Meanwhile, revenue in the company’s Investing & Lending, Equity Securities division is expected to be $915 million, up about 14.7% from the year-ago period.

Heading into today, GS was trading with a Forward P/E of 11.3, which is basically in line with its industry’s average of 11.7. Within the past year, the stock has traded as high as 13.5x forward 12-month earnings and as low as 10.5x. Its median earnings multiple over that time is 11.7x. Investors might conclude that GS shares are slightly discounted compared to their recent valuations.

Earnings ESP Whispers

Investors will also want to anticipate the likelihood that Goldman Sachs surprises investors with better-than-anticipated earnings results. For this, we turn to our Earnings ESP figure.

Zacks Earnings ESP (Expected Surprise Prediction) looks to find earnings surprises by focusing on the most recent analyst estimates. This is done because, generally speaking, when an analyst posts an estimate right before an earnings release, it means that they have fresh information which could potentially be more accurate than what analysts thought about a company two or three months ago.

A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.

Goldman Sachs is currently holding a Zacks Rank #3 (Hold) and an Earnings ESP of 0.0%. This means that the most recent analyst estimates have been in line with the consensus. In other words, our model is not conclusively calling for a beat.

Surprise History

Another important thing to consider ahead of Goldman’s report is the company’s history of earnings surprises and the effect that these surprises have had on share prices. The firm has surpassed earnings estimates in each of the trailing three quarters, but these beats have not necessarily generated momentum immediately.

We judge the price effect of these earnings beats by comparing the closing price of the stock two days before the report and two days after the report. Over the course of Goldman’s streak, the stock has turned negative in all three of these windows.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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