The Goldman Sachs Group Inc. (GS) is scheduled to report its first-quarter 2011 results before the market opens on Tuesday, April 19. The Zacks Consensus Estimate for the first quarter is 75 cents per share, representing a decline of about 86.58% from the year-ago quarter.
We expect Goldman to benefit from its well managed global franchise, strong capital base and industry leading position in trading and asset management. Though the company recorded reduced equity trading and overall revenue decline in the last quarter, its prudent business model and strong fundamentals are expected to deliver better earnings in the upcoming quarter.
Previous Quarter Performance
Goldman’s fourth-quarter 2010 earnings per share of $3.79 outpaced the Zacks Consensus Estimate of $3.73. In spite of challenging economic conditions, the company stood to gain from a solid balance sheet and global clients. Goldman’s results were nevertheless affected by poor performance in Investment Banking and significantly higher operating expenses.
Net income for the quarter came in at $2.4 billion compared with $1.9 billion in the prior quarter and $4.9 billion in the prior-year quarter.
Earnings Estimate Revisions – Overview
Prior to the earnings release, there was no estimate revision over the last 7 days. The unchanged estimates justify the stability in the stock.
We will now look into the details of earnings estimate revisions to substantiate why investors should be neutral on this stock.
Agreement of Analysts
Looking at the estimate revision trends, it is quite clear that analysts are in agreement with the stable first-quarter earnings outlook for Goldman. Of the 12 analysts covering the stock, none has changed their estimates for the first quarter over the last 7 days.
Also, for FY11 and FY12, none of the analysts has revised their estimates over the last 7 days. This indicates no clear directional pressure on the performance of the stock in the near term.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate for the first quarter remained unchanged at operating earnings of 75 cents per share over the last 7 days. However, estimates for FY11 moved up from earnings per share of $13.72 to $13.82. For FY12, estimates dropped by 4 cents to $19.24 per share.
The magnitude of estimate revisions explains why investors should be neutral on Goldman in the short run. However, adding the stock to an investor’s portfolio for the long haul will be a good decision at this point.
Earnings Surprise
Goldman’s performance has been stable over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 25%. This implies that the company has outpaced the Zacks Consensus Estimate by the same magnitude over the last four quarters.
By and Large
Last month, Goldman received regulators’ permission to pay back $5 billion to Warren Buffett’s Berkshire Hathaway Inc. (BRK.A) for investment made at the peak of the financial crisis in 2008. According to the deal, Goldman will pay 10% interest on preferred shares annually, representing an annual expense of $500 million. The company will pay $5.65 billion to buy back preferred shares sold to Berkshire. The purchase amount includes 10% premium on investment, $125 million first-quarter dividend and $24 million in accelerated dividends.
Due to the inclusion of one-time preferred dividend, the repurchase will increase Goldman’s first quarter 2011 earnings by $2.80 per share. While the redemption comes at a high price for Goldman, it reduces its expenses and indicates the company’s financial strength in the market.
Like other banks, Goldman also got approval for its capital spending plan for 2011 from the Federal Reserve, including the repurchase of common stock and a possible hike in the quarterly dividend.
Fitch Ratings lifted its outlook on Goldman to ‘Stable’ from ‘Negative’. The rating agency was impressed by Goldman’s settlement of some of the legal and regulatory disputes that resulted in Negative rating outlook in May 2010. Further, Goldman’s steady earnings performance along with maintaining a leading investment banking franchise drives Fitch to provide a Stable Outlook on the company.
However, sluggish lending activity remains the major concern for Goldman at this point. As net interest margin (NIM) continues to remain under pressure, its traditional banking businesses may face challenges. Moreover, with the new banking regulations, there will be pressure on fees and loan growth is expected to remain feeble. We expect NIM to remain depressed at least though the first half of 2011.
Conclusion
The estimate revision trends and magnitude of revision do not reflect any clear directional pressure on the shares over the near term.
Goldman currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.
Close on the heels of Goldman, among other major banks, Wells Fargo & Company (WFC) and Morgan Stanley (MS) are scheduled to report on April 20 and April 21, respectively.
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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