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Goldman's (GS) Diversified Business Supports Amid Cost Woes

·4 min read

On May 25, we issued an updated report on Goldman Sachs GS, which has a leading global position in completed mergers and acquisitions. The company’s impressive client activity amid volatile markets is anticipated to yield positive results.

Organic growth, steady capital-deployment activities and business diversification continue to drive Goldman’s growth. However, litigation issues and cost base remain concerns.

Shares of the company have gained 10.5% in the past three months compared with the industry’s rally of 9.7%.

Further, the company’s earnings estimate moved 44.8% and 8.1% upward, for the current and next year, respectively, over the past 60 days. The stock currently carries a Zacks Rank #3 (Hold).

While overall revenues have been affected by volatile market conditions over the last few quarters, Goldman is well positioned for growth, on its strong investment banking (IB) operations and solid client franchise. Notably, so far in 2021, IB revenues have witnessed a significant jump on the back of stellar deal making activities and strong equity markets. These, in turn, are likely to help the company leverage on the improving environment.

Furthermore, the key source of the company’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. Notably, Goldman has launched a digital consumer lending platform — Marcus by Goldman Sachs. In February 2021, it introduced an automated wealth-management platform called Marcus Invest and the company is likely to benefit from its exposure to the fast-growing exchange-traded funds (ETF) market.

Driven by a solid capital position, Goldman has consistently enhanced shareholders’ value with steady capital-deployment activities. Following the announcement of the second-round of 2020 stress test results, the company resumed share repurchases in first-quarter 2021, which was suspended following the coronavirus crisis. This not only reflects the company’s commitment to return value to shareholders but also its healthy position to endure severe economic downturns.

Nonetheless, Goldman’s bottom line has been affected in the past few years by its rising cost base. The same witnessed a four-year CAGR of 11.4% in 2020, due to higher compensation and litigation expenses. Notably, in January 2020, the company announced plans to reduce costs by $1.3 billion over a period of three years. Nevertheless, investments in technology and rise in transaction-based expenses during periods of higher client activity will keep the expense trend volatile.

Moreover, 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 company has resolved certain litigations related to the sale of risky mortgage-backed securities, many of the cases are yet to be settled. All these are expected to lead to elevated expenses and litigation provisions in the near term.

Stocks to Consider

Tradeweb Markets Inc TW has witnessed upward earnings estimate revisions for 2021 over the past 30 days. Moreover, this Zacks #2 Ranked (Buy) stock has gained 34.5% over the past six months. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Evercore Inc.’s EVR current-year earnings estimate moved north in 30 days’ time. Further, the company’s shares have surged 57.5% over the past six months. At present, it holds a Zacks Rank of 2.

Hancock Whitney Corporation HWC has recorded upward earnings estimate revision for the ongoing year in the past 30 days. This Zacks #1 Ranked stock has depreciated 62.1% over the past six months.

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