On Friday, Fitch Ratings lifted its outlook on The Goldman Sachs Group Inc. (GS) to ‘Stable’ from ‘Negative’. The rating agency is impressed by GS’s settlement of some of the legal and regulatory disputes that resulted in Negative rating outlook in May 2010.
Fitch Ratings confirmed GS’s long-term Issuer Default Rating (IDR) at ‘A+’, short-term IDR at ‘F1+’, and its individual rating at ‘B/C’. Additionally, the rating agency assigned long-term and short-term IDRs of ‘A+’ and ‘F1+’, respectively, to Goldman Sachs & Co, a subsidiary of GS.
The revision to Stable outlook includes $550 million settlement of GS with the Securities and Exchange Commission (SEC) regarding the ABACUS transaction in which GS acted as a underwriter. Collectively, Fitch expects the regulatory matters to be manageable for GS and anticipates the company to maintain a financial stability.
GS’s steady earnings performance while maintaining a leading investment banking franchise drives Fitch to provide a Stable Outlook on the stock. On the other hand, significant deterioration in earnings, liquidity or increase in risk and leverage, would unfavorably influence its ratings.
Further, the ratings affirmation reflects GS’s buoyancy during the crisis. Despite some of the continuing regulatory uncertainties and intricate operating environment, the company maintained de-levered balance sheet, well-built liquidity profile, established earnings power and strong franchise.
As of December 2010, GS also had ‘Negative’ outlook from Standard & Poor’s (S&P) Ratings Services and Moody’s Investors Service, the ratings arm of Moody’s Corp. (MCO).
Fundamentally, we expect GS to benefit from its well managed global franchise, strong capital base and industry leading position in trading and asset management. Though the company recorded lower equity trading and overall revenue decline in the fourth quarter of 2010, its prudent business model and strong fundamentals are expected to deliver robust earnings in the upcoming quarters. Further, rating upgrade by Fitch will act as a catalyst to boost the investors’ confidence.
Estimate Revision Trends
GS is scheduled to release its first-quarter 2011 earnings on April 19, 2011. Over the last 30 days, 9 of the 11 analysts covering GS have lowered their estimates for the first quarter of 2011, while no upward revision was witnessed.
Currently, the Zacks Consensus Estimate for the first quarter is operating earnings of 75 cents per share, a decline of 86.50% from the year-ago quarter. Furthermore, over the last 30 days, operating earnings estimates for the first quarter of 2011 dropped significantly from $3.98 per share to 75 cents.
GS currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock. GS’s closest peer – Morgan Stanley (MS) retains a Zacks #5 Rank (a short-term Strong Sell rating).
GOLDMAN SACHS (GS): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
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