It has been about a month since the last earnings report for Goldman Sachs (GS - Free Report) . Shares have lost about 2.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Goldman due for a breakout? 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 catalysts.
Goldman Q1 Earnings Beat, Expenses Down
Reflecting the rank #1 in worldwide completed mergers and acquisitions, Goldman’s first-quarter 2019 results recorded a positive earnings surprise of 20.5%. The company reported earnings per share of $5.71, comfortably beating the Zacks Consensus Estimate of $4.74. However, the bottom line compares unfavorably with earnings of $6.95 per share recorded in the year-earlier quarter.
The investment bank turned triumphant with strong financial advisory revenues. Further, lower expenses reflected prudent expense management. However, lower Fixed Income, Currency and Commodities Client Execution (FICC) revenues, along with investment management revenues, were undermining factors. Also, lower underwriting revenues were a major drag.
Notably, improved market conditions were witnessed in the reported quarter, however, low levels of volatility and client activity were on the downside.
Revenues Decline, Expenses Down
Goldman’s net revenues were down 13% year over year to $8.8 billion in the quarter under review.
Quarterly revenues, as per business segments, are as follows:
The Institutional Client Services division recorded revenues of $3.6 billion, down 18% year over year. The fall indicates decrease in equities revenues (down 24%), backed by lower equities client execution (down 36%), commissions and fees (down 13%) and securities service revenues (down 14%).
Notably, lower net revenues in FICC (down 11% year over year), impacted by reduced revenues from interest rate, currencies and credit products were recorded. These were partly mitigated by higher revenues from mortgages and commodities.
The Investing and Lending division’s revenues of $1.8 billion in the quarter under review came in 14% lower year over year. Decline in revenues from investments in equities, as well as debt securities & loans led to the downside.
The Investment Management division recorded revenues of $1.6 billion, down 12% year over year. The decline was mainly due to lower transaction and incentive fees, along with reduced management and other fees.
The Investment Banking division generated revenues of around $1.8 billion, up 1% year over year. Results highlight increased financial advisory revenues (up 51%). Notably, industry-wide completed mergers and acquisitions volumes went up. These were mostly offset by lower underwriting revenues (down 24%), aided by reduced equity and debt underwriting revenues.
Total operating expenses declined 11% year over year to $5.9 billion. Expenses dropped mainly due to fall in compensation and benefits expenses, along with reduced brokerage, clearing, exchange and distribution fees due to low activity levels. These declines were partly offset by elevated expenses for consolidated investments and technology.
Notably, lower net provisions for litigation and regulatory proceedings were recorded.
Provision for credit losses was $224 million in the quarter, significantly higher than the $44 million in the prior-year quarter. Higher provisions are reflected related to the consumer loan portfolio.
Strong Capital Position
Goldman displayed a robust capital position in the reported quarter. As of Mar 31, 2019, the company’s Common Equity Tier 1 ratio was 13.4% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from 13.1% recorded in the prior quarter.
The company’s supplementary leverage ratio, on a fully phased-in basis, was 6.4% at the end of the Jan-Mar quarter, up from 6.2% witnessed in the previous quarter.
Return on average common shareholders’ equity, on an annualized basis, was 11.1% in the reported quarter.
Capital Deployment Update
During first-quarter 2019, the company repurchased 6.3 million shares of its common stock at average price per share of $197.08 and a total cost of $1.25 billion.
For 2019, Goldman expects tax rate to be between 22% and 23%, excluding the impact of equity-based compensation.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Goldman has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, 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 aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Goldman has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.