Goldman Sachs Group Inc. (GS) reported first quarter earnings of 2010 on Apr 20th that were significantly ahead of the Zacks Consensus Estimate, led by strong top-line growth though partially offset by higher-than-expected operating expenses. However, investors’ reactions on the better-than-expected results were quite tepid on the Wall Street due to the ongoing litigation issues that drained out the excitement.
Consequently, the stock has continued to fall since its earnings release. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the short term and long term outlook for the stock.
Earnings Report Review
It’s always encouraging to outperform estimates, particularly when the difference is substantial enough to gain optimism for a promising future. A quick look on the top-line reveals that while trading operations remained persistently strong, investment banking operations improved year-over-year. However, asset management services remained weak on the backdrop of a sluggish macro economic environment that resulted in significant money market outflows.
Goldman tops the industry by acquiring the leading position in the world-wide announced and completed M&A and public common stock offering year-to-date, putting behind it top rivals such as Credit Suisse Group (CS) (#2) and Morgan Stanley (MS) (#3). The company advised on a number of sizeable transactions during the first quarter of 2010.
(Our full coverage on the earnings is available at: Goldman Outperforms Estimates)
Earnings Estimate Revisions – Overview
Estimates have witnessed modest movement for Goldman since the earnings release. This is not bad news at all. In fact, it gives quite a valid reason to own a stock that benefits from good news and provides a scope for rising in the future. The earnings estimate details are more deeply delved into below.
Agreement of Estimate Revisions
Given the exceptionally strong fundamentals, analysts are excited not only about the way Goldman has weathered the storm of the financial downturn, but also as it has taken its industry-leading position. Analysts, therefore, agree with the optimistic future outlook for Goldman’s earnings.
As a result, we see below that 16 analysts have increased their estimates for 2010 while none of them have lowered their estimates. This is encouraging. However, looking into 2011, 8 analysts have raised their estimates while a couple of analysts lowered them. This gives room for marginal caution over the intermediate term.
Magnitude of Estimate Revisions
Earnings estimates have shown modest improvement, upping from $17.93 to $19.57, since the earnings release. However, estimates moved marginally upwards for 2011. This overall looks promising, particularly when so many other stocks are experiencing a downfall. Analysts continue to value Goldman’s earnings at a considerable premium.
Goldman in Neutral Lane
Goldman exhibits strong levels of capital and liquidity, which could be utilized to tap newer opportunities as the market recovers. We believe that the key drivers for future growth include opportunities in distressed investments where Goldman is uniquely positioned, improved investment banking led by M&A and redeployment of excess liquidity.
However, it remains to be seen if the gradual growth will be sustainable in the upcoming quarters. The recent allegations from the regulatory authorities in the U.S. and U.K. unveils the company’s investment in collateral debt securities (CDOs) that performed dismally since they were invested in securities comprising subprime mortgages, which are known to have larger-than-average risk of defaulting in the market.
Besides the current litigation issues on civil frauds, consumer lending and higher bonus payments have augmented risk on the financials and reputation of Goldman. Though management is taking initiatives to reduce the CDO and commercial real estate exposure, we don’t expect any significant improvement on that front in the near future.
Nevertheless, fundamentally, the company is poised to grow significantly with its well-diversified business model and a more favorable operating environment. In all, we think Goldman’s sturdy capital and liquidity will lead to an increased profitability from newer opportunities once the economy recovers. Hence, we are maintaining a Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock is also reiterated at Neutral.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “GS”
Read the full analyst report on “CS”
Read the full analyst report on “MS”
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