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Goldman Sachs (GS) Up 7.8% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Goldman Sachs Group, Inc. (The) (GS - Free Report) . Shares have added about 7.8% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? 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 drivers.

Goldman Tops Q4 Earnings Estimates on Solid Revenues

Driven by a surge in fixed-income revenues, Goldman’s fourth-quarter 2016 results recorded a positive earnings surprise of 6.7%. The company reported earnings per share of $5.08, outpacing the Zacks Consensus Estimate of $4.76. Moreover, the bottom line witnessed significant improvement on a year-over-year basis.

Results were primarily aided by fixed income revenues and lower expenses. Management stated the Fixed Income, Currency and Commodities Client Execution unit experienced improved market conditions, with rise in interest rates and tighter credit spreads.

Net earnings of $2.3 billion reflected a whopping rise from the prior-year quarter.

For full-year 2016, net income per share of $16.29 was higher than the year-ago earnings of $12.14. Earnings were also above the Zacks Consensus Estimate of $15.75 per share.

Solid Revenues & Low Expenses

For full-year 2016, the company’s reported revenues of $30.6 billion were down 9% year over year. However, revenues managed to beat the Zacks Consensus Estimate of $29.9 billion.

Goldman’s net revenue climbed 12% year over year to $8.2 billion in the quarter under review. In addition, revenues exceeded the Zacks Consensus Estimate of $7.4 billion.

Quarterly revenues, as per business segments, are as follows:

The Institutional Client Services division recorded revenues of $3.6 billion, up 25% year over year. The rise reflected strong growth in Fixed Income, Currency and Commodities Client Execution revenues (up 78% year over year), driven by higher revenues in all businesses, mainly from interest rate and products and credit products.

However, due to lower net revenues in equities client execution, the company recorded fall in Equities revenues (down 9%). But, lower volumes resulted in reduced commissions and fees.

The Investment Banking division generated revenues of $1.5 billion, down 4% year over year. Results reflected lower financial advisory revenues (down 19%), affected by the decreased number of industry-wide transactions during the quarter. However, the quarter witnessed higher debt underwriting, partially offset bylower equity underwriting fees.

The Investment Management division recorded revenues of $1.6 billion, up 3% year over year. The growth was mainly driven by higher incentive and transaction fees, while management and other fees declined.

The Investing and Lending division’s revenues of $1.5 billion in the quarter increased 15% year over year. The rise was aided by surge in revenues from investments in equities as well as higher revenues in debt securities and loans.

Total operating expenses plunged 23% year over year to $4.8 billion. Expenses fell largely due to decline in almost all components of expenses except compensation and employee benefits expenses (up 19%). Non-compensation expenses were also down 44% due to decreased provisions for litigation and regulatory proceedings.

Strong Capital Position

Goldman exhibited a robust capital position in the reported quarter. As of Dec 31, 2016, 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 12.4% in the prior-year quarter. The company’s supplementary leverage ratio on a fully phased-in basis was 6.4% at the end of the fourth quarter, up from 5.9% in the prior-year quarter.

Adjusted return on average common shareholders’ equity, on an annualized basis, was 11.4% in the reported quarter.

Capital Deployment Update

During 2016, Goldman repurchased 36.6 million shares of its common stock at an average price per share of $165.88 and a total cost of $6.07 billion. Notably, during fourth-quarter 2016, the company repurchased 7.6 million shares of its common stock at an average price per share of $197.8 and a total cost of $1.50 billion.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter compared to one lower. In the past month, the consensus estimate has shifted by 12.33% due to these changes.

VGM Scores

At this time, Goldman Sachs' stock has a poor score of 'F' on both growth and momentum front. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregte VGM Score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate investors will probably be better served looking elsewhere.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #2 ( Buy). We are expecting an above average return from the stock in the next few months.


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