A month has gone by since the last earnings report for Goldman Sachs (GS). Shares have added about 5.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Goldman due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Goldman Q3 Earnings Miss on Lower Revenues
Goldman Sachs posted a negative earnings surprise of 4.8% in third-quarter 2019. The company reported earnings per share of $4.79, missing the Zacks Consensus Estimate of $5.03. Further, the bottom-line figure compares unfavorably with earnings of $6.28 per share recorded in the year-earlier quarter.
The investment bank disappointed with its lower financial advisory and underwriting revenues. Also, lower investing and lending revenues was on the downside. Additionally, rise in expenses was a major drag. However, higher FICC revenues provided some respite.
Notably, high levels client activity was on the upside in the reported quarter.
Revenues Decline, Expenses Up
Goldman’s net revenues were down 6% year over year to $8.3 billion in the reported quarter. The revenue figure also lagged the Zacks Consensus Estimate of $8.6 billion.
Quarterly revenues, as per business segments, are as follows:
The Institutional Client Services division recorded revenues of $3.3 billion, up 6% year over year. This upside indicates higher net revenues in Fixed Income, Currency and Commodities Client Execution (up 8% year over year), driven by elevated revenues from interest rate, mortgages, commodities and credit products. These were partly mitigated by lower revenues from currencies.
Furthermore, higher equities revenues (up 5%), backed by stable equities client execution, elevated commissions and fees (up 8%) and securities service revenues (up 7%), were on the upside.
The Investment Management division recorded revenues of $1.7 billion, down 2% year over year. This downside mainly stemmed from lower transaction and incentive fees, partly offset by higher management and other fees.
The Investment Banking division generated revenues of around $1.7 billion, down 15% year over year. Results suggest decreased financial advisory revenues (down 22%) which reflects decline in industry-wide completed mergers and acquisition activities. Furthermore, lower underwriting revenues (down 9%), aided by reduced equity and debt underwriting revenues, were recorded.
The Investing and Lending division’s revenues of $1.7 billion in the September-end quarter came in 17% lower year over year. Decreased revenues from investments in equities, as well as debt securities & loans resulted in this downside.
Total operating expenses flared up around 1% year over year at $5.6 billion. Rise in almost all components of expenses, partly offset by lower compensation and benefits and other expenses led to the increase.
Notably, lower net provisions for litigation and regulatory proceedings were recorded.
Provision for credit losses was $291 million in the third quarter, up 67% year over year. Higher provisions are related to rise in impairments.
Strong Capital Position
Goldman displayed a robust capital position in the reported quarter. As of Sep 30, 2019, the company’s Common Equity Tier 1 ratio was 13.4% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from the prior quarter’s 13.5%.
The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.2% at the end of the July-September quarter, down from 6.4% in the previous quarter.
Return on average common shareholders’ equity, on an annualized basis, was 9% in the quarter.
Capital Deployment Update
During third-quarter 2019, the company repurchased 3.1 million shares of its common stock at an average price per share of $217.66 and a total cost of $1.14 billion, and paid around $466 million of common stock dividends.
For 2019, Goldman expects tax rate to be 22%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
At this time, Goldman has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. 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. It's no surprise Goldman has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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