Why Is Goldman (GS) Down 3.3% Since Last Earnings Report?
It has been about a month since the last earnings report for Goldman Sachs (GS). Shares have lost about 3.3% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Goldman Q4 Earnings Beat Estimates on High Revenues
Reflecting the highest net revenues since 2010, Goldman Sachs’ fourth-quarter 2018 results recorded a positive earnings surprise of 23.8%. The company reported earnings per share of $6.04, comfortably beating the Zacks Consensus Estimate of $4.88. The bottom line also compares favorably with adjusted earnings of $5.68 per share recorded in the year-earlier quarter.
The investment bank turned triumphant with strong equities and financial advisory revenues. In addition, Investment Management business was strong. However, lower Fixed Income, Currency and Commodities Client Execution (FICC) revenues and elevated expenses were undermining factors. Further, lower underwriting revenues was a major drag.
For full-year 2018, net income per share of $25.27 came in higher than the year-ago earnings of $9.01. Earnings also surpassed the Zacks Consensus Estimate of $24.73.
Revenues Decline Y/Y, Expenses Escalate
For full-year 2018, the company’s reported revenues of $36.6 billion were up 12% year over year. Moreover, revenues managed to beat the Zacks Consensus Estimate of $36 billion as well.
Goldman’s net revenues were down 1% year over year to $8.1 billion in the quarter under review. However, the revenue figure handily outpaced the Zacks Consensus Estimate of $7.9 billion.
Quarterly revenues, as per business segments, are as follows:
The Investment Banking division generated revenues of around $2 billion, down 5% year over year. Results highlight lower underwriting revenues (down 38%), aided by reduced equity and debt underwriting revenues, partly offset by increased financial advisory revenues (up 56%). Notably, industry-wide completed mergers and acquisitions volumes went up.
The Investment Management division recorded revenues of $1.7 billion, up 2% year over year. The uptick was mainly driven by elevated transaction and incentive fees.
The Institutional Client Services division recorded revenues of $2.4 billion, up 2% year over year. The rise indicates increase in equities revenues, backed by higher equities client execution (up 80%) and commissions and fees (up 8%), partly offset by lower securities service revenues (down 2%).
Notably, lower net revenues in Fixed Income, Currency and Commodities Client Execution (down 18% year over year), impacted by reduced revenues from interest rate and credit products, were recorded. Revenues remained stable for mortgages, commodities and currencies.
The Investing and Lending division’s revenues of $1.9 billion in the quarter under review came in 2% lower year over year. The downside stemmed from the decline in revenues from investments in equities, partially muted by higher revenues from debt securities & loans.
Total operating expenses flared up 9% year over year to $5.2 billion. Expenses shot up mainly due to rise in non-compensation expenses, partly muted by lower compensation expenses (down 11%).
Notably, higher net provisions for litigation and regulatory proceedings were recorded.
Provision for credit losses was $222 million in the quarter, down 23.4% year over year.
Strong Capital Position
Goldman displayed a robust capital position in the reported quarter. As of Dec 31, 2018, the company’s Common Equity Tier 1 ratio was 13.1% under the Basel III Advanced Approach, highlighting the valid transitional provisions. The figure was up from 10.7% recorded in the prior-year quarter.
The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.2% at the end of the Oct-Dec quarter, up from 5.8% witnessed in the previous-year quarter.
Return on average common shareholders’ equity, on an annualized basis, was 12.1% in the reported quarter, and13.3% for 2018.
Capital Deployment Update
During 2018, Goldman repurchased 13.9 million shares of its common stock at an average price per share of $236.22 and a total cost of $3.29 billion. Notably, during fourth-quarter 2018, the company repurchased 5.6 million shares of its common stock at an average price per share of $222.30 and a total cost of $1.25 billion.
Outlook
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?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
At this time, Goldman has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile 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.
Outlook
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 #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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