A month has gone by since the last earnings report for Goldman Sachs (GS). Shares have lost about 8.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Goldman due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Goldman Q2 Earnings Beat, FICC Revenues Disappoint
Reflecting the rank #1 in worldwide completed mergers and acquisitions, Goldman’s second-quarter 2019 results recorded a positive earnings surprise of 22.8%. The company reported earnings per share of $5.81, comfortably beating the Zacks Consensus Estimate of $4.73. However, the bottom-line figure compares unfavorably with earnings of $5.98 per share recorded in the year-earlier quarter.
The investment bank turned triumphant with strong investing and lending revenues, along with elevated equities revenues. Further, stable expenses reflect prudent expense management. However, lower Fixed Income, Currency and Commodities Client Execution (FICC) revenues, along with investment management revenues, were undermining factors. Also, lower financial advisory and underwriting revenues were major drags.
Notably, low levels of volatility and client activity were on the downside in the reported quarter.
Revenues Decline, Expenses Stable
Goldman’s net revenues were down 2% year over year to $9.5 billion in the reported quarter. The revenue figure, however, surpassed the Zacks Consensus Estimate of $8.7 billion.
Quarterly revenues, as per business segments, are as follows:
The Institutional Client Services division recorded revenues of $3.5 billion, down 3% year over year. The downside indicates lower net revenues in Fixed Income, Currency and Commodities Client Execution (down 13% year over year), affected by reduced revenues from interest rate, currencies and credit products. These were partly mitigated by higher revenues from mortgages and commodities.
However, higher equities revenues (up 6%), backed by elevated equities client execution (up 12%), commissions and fees (up 2%) and securities service revenues (up 5%), were on the upside.
The Investment Management division recorded revenues of $1.6 billion, down 14% year over year. This decline was mainly due to lower transaction and incentive fees, partly offset by higher management and other fees.
The Investment Banking division generated revenues of around $1.9 billion, down 9% year over year. Results highlight decreased financial advisory revenues (down 3%) which reflects decline in industry-wide completed mergers and acquisitions activity. Furthermore, lower underwriting revenues (down 12%), aided by reduced equity and debt underwriting revenues, were recorded.
The Investing and Lending division’s revenues of $2.5 billion in the June-end quarter came in 16% higher year over year. Upsurge in revenues from investments in equities, as well as debt securities & loans led to this increase.
Total operating expenses remained stable year over year at $6.1 billion. Fall in compensation and benefits expenses were mostly offset by elevated expenses for consolidated investments and technology.
Notably, lower net provisions for litigation and regulatory proceedings were recorded.
Provision for credit losses was $214 million in the second quarter, down 9% year over year. Lower provisions are related to purchased credit impaired loans.
Strong Capital Position
Goldman displayed a robust capital position in the reported quarter. As of Jun 30, 2019, the company’s Common Equity Tier 1 ratio was 13.8% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from the prior quarter’s 13.7%.
The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.4% at the end of the April-June quarter, in line with the previous quarter.
Return on average common shareholders’ equity, on an annualized basis, was 11.1% in the reported quarter.
Capital Deployment Update
During second-quarter 2019, the company repurchased 6.2 million shares of its common stock at an average price per share of $200.73 and a total cost of $1.25 billion, and paid around $319 million of common stock dividends.
For 2019, Goldman expects tax rate to be between 22% and 23%, excluding the impact of equity-based compensation.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
Currently, Goldman has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Goldman has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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