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Why Goldman's Shocking Quarter Shouldn't Worry Bank Investors
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Shares of Goldman Sachs (GS - Free Report) slumped as much as 3% on Wednesday morning after the company posted its fourth-quarter earnings report. While profits excluding one-time items actually beat our consensus estimates, the investment banking behemoth witnessed a shocking drop in trading revenues—leading to its first loss in six years when factoring in a tax legislation charge.
Goldman reported adjusted earnings of $5.68 per share, beating the Zacks Consensus Estimate of $4.90 and expanding 11.8% year-over-year. However, a $4.4 billion charge related to the recent tax bill’s consideration of overseas profits and accounting practices resulted in a quarterly loss of $1.93 billion, or $5.51 per share.
Total revenues in the quarter came in at $7.8 billion, surpassing our consensus estimate of $7.6 billion. For the full fiscal year, revenues were $32.1 billion, up about 5% year-over-year. Still, investors were shocked at the results in Goldman’s Institutional Client Services division, which brought in just $2.4 billion in the fourth quarter.
Revenues in this unit were down 34% from the prior-year quarter. The sharp decline underscored weak revenues in the company’s ever-important fixed income, currencies, and commodities operations. Total revenues in this category were down about 50% year-over-year.
Goldman’s first net loss in six years will certainly grab headline, but the company’s Q4 performance does really not change the fundamental picture for the financial sector. We already knew trading revenues would be down this quarter. A less volatile global market means less trading activity, which cuts into the top line.
Last week, JPMorgan Chase (JPM - Free Report) reported a decline in fixed income trading. Similarly, fixed income revenues at Citigroup (C - Free Report) were down about 18%. Bank of America (BAC - Free Report) just reported a double-digit decline in fixed income revenues on Wednesday, and our consensus estimate are calling for the same from Morgan Stanley (MS - Free Report) tomorrow.
Goldman’s exposure to fixed income trading means that weakness in this segment will typically hit it the hardest. But Goldman and its competitors should still stand to benefit from the number of positive forces driving the financial sector.
“With the global economy poised to accelerate, new U.S. tax legislation providing tailwinds and a leading franchise across our businesses, we are well positioned to serve our clients and make significant progress on the growth plan we outlined in September,” Goldman CEO Lloyd C. Blankfein said in a statement.
Meanwhile, the one-time charge that caused Goldman to sink into the red will shortly be outweighed by the company’s lower effective tax rate. Goldman executives confirmed that the firm will pay about 24% in the upcoming year.
Stepping back a bit, our “Finance” sector is currently ranked #1 out of the 16 sectors tracked by the Zacks Sector Rank. The group has witnessed 154 total positive earnings estimate revisions, outweighing the total of negative revisions by about 27. The average projected earnings growth in the Finance sector sits at 15.06%, which crushes the 11.84% we expect to see in the broader S&P 500. But the group also has an average PEG ratio of 1.70, so investors are getting a great price for that earnings growth right now.
Want more analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
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Why Goldman's Shocking Quarter Shouldn't Worry Bank Investors
Shares of Goldman Sachs (GS - Free Report) slumped as much as 3% on Wednesday morning after the company posted its fourth-quarter earnings report. While profits excluding one-time items actually beat our consensus estimates, the investment banking behemoth witnessed a shocking drop in trading revenues—leading to its first loss in six years when factoring in a tax legislation charge.
Goldman reported adjusted earnings of $5.68 per share, beating the Zacks Consensus Estimate of $4.90 and expanding 11.8% year-over-year. However, a $4.4 billion charge related to the recent tax bill’s consideration of overseas profits and accounting practices resulted in a quarterly loss of $1.93 billion, or $5.51 per share.
Total revenues in the quarter came in at $7.8 billion, surpassing our consensus estimate of $7.6 billion. For the full fiscal year, revenues were $32.1 billion, up about 5% year-over-year. Still, investors were shocked at the results in Goldman’s Institutional Client Services division, which brought in just $2.4 billion in the fourth quarter.
Revenues in this unit were down 34% from the prior-year quarter. The sharp decline underscored weak revenues in the company’s ever-important fixed income, currencies, and commodities operations. Total revenues in this category were down about 50% year-over-year.
Goldman’s first net loss in six years will certainly grab headline, but the company’s Q4 performance does really not change the fundamental picture for the financial sector. We already knew trading revenues would be down this quarter. A less volatile global market means less trading activity, which cuts into the top line.
Last week, JPMorgan Chase (JPM - Free Report) reported a decline in fixed income trading. Similarly, fixed income revenues at Citigroup (C - Free Report) were down about 18%. Bank of America (BAC - Free Report) just reported a double-digit decline in fixed income revenues on Wednesday, and our consensus estimate are calling for the same from Morgan Stanley (MS - Free Report) tomorrow.
Goldman’s exposure to fixed income trading means that weakness in this segment will typically hit it the hardest. But Goldman and its competitors should still stand to benefit from the number of positive forces driving the financial sector.
“With the global economy poised to accelerate, new U.S. tax legislation providing tailwinds and a leading franchise across our businesses, we are well positioned to serve our clients and make significant progress on the growth plan we outlined in September,” Goldman CEO Lloyd C. Blankfein said in a statement.
Meanwhile, the one-time charge that caused Goldman to sink into the red will shortly be outweighed by the company’s lower effective tax rate. Goldman executives confirmed that the firm will pay about 24% in the upcoming year.
Stepping back a bit, our “Finance” sector is currently ranked #1 out of the 16 sectors tracked by the Zacks Sector Rank. The group has witnessed 154 total positive earnings estimate revisions, outweighing the total of negative revisions by about 27. The average projected earnings growth in the Finance sector sits at 15.06%, which crushes the 11.84% we expect to see in the broader S&P 500. But the group also has an average PEG ratio of 1.70, so investors are getting a great price for that earnings growth right now.
Want more analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>