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Diversification Supports Goldman (GS), Cost Woes Prevail

Zacks Equity Research
·4 min read

Goldman Sachs GS can be a solid bet now backed by its leading global position in completed mergers and acquisitions. The company’s strong client activity amid volatile markets is anticipated to yield positive results.

Organic growth, cost management and steady capital-deployment activities continue to drive Goldman’s growth. However, litigation issues are concerns.

Expense management and business diversification have aided the company to gain 10.5% in the past three months compared with the industry’s growth of 14.1%.



Further, the company’s earnings estimates moved 8.5% and 26.1% upward, for the current and next year, respectively, over the past 30 days. As a result, the stock carries a Zacks Rank #3 (Hold).

For the past few years, Goldman has been benefiting from its prudent expense-reduction initiatives. Though expenses have been volatile, the figure declined significantly in 2016 but witnessed a three-year CAGR of 9% in 2019 on higher compensation and litigation expenses. This uptrend continued in the first nine months of 2020 as well. Nevertheless, the company completed an expense-reduction initiative and generated nearly $900 million of run-rate savings. The bank is focused on improving efficiency, while maintaining a solid franchise and investing in new opportunities.

While overall revenues have been affected by the unfavorable market conditions in the last few quarters, Goldman is well positioned for growth, given its strong investment banking operations and solid client franchise. These, in turn, are likely to help the company leverage on the improving environment.

Furthermore, the key source of the bank’s earnings stability is its business diversification. Within traditional banking, a diversified product portfolio has higher chances of sustaining growth than many other banks, which have exited some of these areas.

Following the announcement of the 2020 stress test results, Goldman maintained the dividend level as before and kept share repurchases suspended in the third quarter as well following the coronavirus crisis. This not only reflects the company’s commitment to return value to the shareholders but also its healthy position to endure severe economic downturns.

However, Goldman has high dependence on overseas revenues as reflected in the last few years. A number of risks stemming from the regulatory and political environment, foreign-exchange fluctuations and performance of regional economy might hurt its top line. Also, though the bank has already resolved certain litigations related to the sale of risky mortgage-backed securities, many of the cases are yet to be resolved. All these are expected to result in elevated expenses and litigation provisions in the near term.

Stocks to Consider

Evercore Inc EVR has witnessed upward earnings estimate revisions for 2020 for the past 30 days. Moreover, this Zacks #1 Ranked (Strong Buy) stock has gained 41% in three months’ time. You can see the complete list of today’s Zacks #1 Rank stocks here.

Cowen Group, Inc.’s COWN current-year earnings estimate moved north in 30 days’ time. Further, the company’s shares have appreciated 35.4% over the past three months. At present, it holds a Zacks Rank of 2 (Buy).

JMP Group LLC JMP has witnessed upward earnings estimate revision for the ongoing year in the past 30 days. This Zacks #2 Ranked stock has gained 0.2% in the past three months.

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The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
 
Cowen Group, Inc. (COWN) : Free Stock Analysis Report
 
Evercore Inc (EVR) : Free Stock Analysis Report
 
JMP Group LLC (JMP) : Free Stock Analysis Report
 
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Zacks Investment Research