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Goldman (GS) Down 4.6% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Goldman Sachs (GS). Shares have lost about 4.6% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Goldman Sachs Q4 Earnings Disappoint, Revenues Up

Goldman reported a negative earnings surprise of 9.8% in fourth-quarter 2019. The company posted earnings per share of $4.69, missing the Zacks Consensus Estimate of $5.20. Further, the bottom-line figure compares unfavorably with earnings of $6.04 per share recorded in the year-earlier quarter.

The investment bank disappointed with rise in operating expenses and provisions. Moreover, lower financial advisory and corporate lending revenues were on the downside. However, strong underwriting business and higher Fixed Income, Currency and Commodities Client Execution (FICC) revenues provided some respite. In addition, wealth management and consumer banking business reported an upswing.

For full-year 2019, net income per share of $21.03 came in lower than the year-ago earnings of $25.27. Earnings also lagged the Zacks Consensus Estimate of $24.07. Results included impact of $3.16 related to net provisions for litigation and regulatory proceedings during the year.

Revenues Improve, Expenses Up

For full-year 2019, the company reported revenues of $36.5 billion, almost stable year over year. Nevertheless, revenues managed to beat the Zacks Consensus Estimate of $35.3 billion.

Goldman’s net revenues were up 23% year over year to $10 billion in the reported quarter. The revenue figure also beat the Zacks Consensus Estimate of $8.8 billion.

Quarterly revenues, as per business segments, are as follows:

The Global Markets division recorded revenues of $3.5 billion, up 33% year over year. This upside indicates higher net revenues in Fixed Income, Currency and Commodities Client Execution (up 63% year over year), driven by elevated revenues from interest rate, mortgages and commodities. Further, FICC financing was on the upside.

Furthermore, higher equities revenues (up 12%) were recorded, backed by elevated equities intermediation and financing.

The Asset Management division recorded revenues of $3 billion, up 52% year over year. This upside mainly stemmed from elevated equity investments and lending, along with management and other fees, partially mitigated by lower Incentive fees.

The Consumer and Wealth Management division’s revenues of $1.4 billion in the December-end quarter came in 8% higher year over year. Increased revenues from wealth management (up 6%) and consumer banking (up 23%) led to this upsurge.

The Investment Banking division generated revenues of around $2.06 billion, down 6% year over year. Results suggest decreased financial advisory revenues (down 29%), which reflects a decline in industry-wide completed mergers and acquisition activities. Also, corporate lending disappointed with an 8% decline. However, higher underwriting revenues (up 31%), aided by elevated equity and debt underwriting revenues, were on the upside.

Total operating expenses flared up around 42% year over year at $7.3 billion. Rise in almost all components of expenses resulted in this upswing.

Notably, higher net provisions for litigation and regulatory proceedings of $1.9 billion were recorded.

Provision for credit losses was $336 million in the fourth quarter, up 51% 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 Dec 31, 2019, the company’s Common Equity Tier 1 ratio was 13.7% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from the prior-year quarter’s 13.1%.

The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.2% at the end of the October-December quarter, in line with the prior-year quarter.

Return on average common shareholders’ equity, on an annualized basis, was 8.7% in the quarter and 10% for 2019.

Capital Deployment Update

During 2019, Goldman repurchased 25.8 million shares of its common stock at an average price per share of $206.56 and a total cost of $5.34 billion and paid around $1.54 billion of common stock dividends.

Notably, during fourth-quarter 2019, the company repurchased 10.2 million shares of its common stock at an average price per share of $212.67 and a total cost of $2.16 billion, and paid around $453 million of common stock dividends.

Outlook

With regard to CECL adoption, based on Goldman’s loan portfolio as of year-end 2019, management expects to record a day 1 increase to the reserves of approximately $825 million in the first quarter of 2020. This will result in a onetime after-tax reduction to retained earnings of approximately $625 million, which for regulatory capital purposes will be phased in over the prescribed transition period.

For the next few years, Goldman expects tax rate to be 21%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

At this time, Goldman has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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