A month has gone by since the last earnings report for The Goldman Sachs Group, Inc. (GS – Free Report) . Shares have added about 1.2% 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 of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Goldman’s Equities Revenue, Low Costs Drive Q2 Earnings
Goldman’s second-quarter 2017 results recorded a positive earnings surprise of 17.6%. The company reported earnings per share of $3.95, beating the Zacks Consensus Estimate of $3.36. Further, the bottom line witnessed 6% year-over-year improvement.
Higher equities revenues and low expenses were the positives for the quarter. However, lower fixed income revenues were a headwind. Notably, the quarter witnessed challenging market-making environment, reduced levels of volatility and low client activity levels.
Net earnings of $1.83 billion reflected a slight increase from the prior-year quarter.
Solid Revenues in Equity Securities & Low Expenses
Goldman’s net revenue edged down 1% year over year to $7.89 billion in the quarter under review. However, revenues outpaced the Zacks Consensus Estimate of $7.57 billion.
Quarterly revenues, as per business segments, are as follows:
The Institutional Client Services division recorded revenues of $3.1 billion, down 17% year over year. The fall indicated lower net revenues in Fixed Income, Currency and Commodities Client Execution revenues (down 40% year over year), adversely affected by lower revenues from interest rate products, commodities, currencies and credit products, partially offset by high revenues in mortgage products.
However, rise in commissions and fees, along with securities services and equities client execution, resulted in the gain in Equities revenues (up 8%).
The Investment Banking division generated revenues of $1.7 billion, down 3% year over year. Results displayed lower debt and equity underwriting revenues, indicating 1% year-over-year decline in total underwriting fees. Further, lower financial advisory revenues (down 6%) were recorded, affected by the decreased number of completed industry-wide transactions during the quarter.
The Investment Management division recorded revenues of $1.5 billion, up 13% year over year. The growth was mainly driven by higher incentive and transaction fees, along with management and other fees.
The Investing and Lending division’s revenues of $1.6 billion in the quarter were significantly higher on a year-over-year basis. The rise was aided by surge in revenues from investments in equities, partially offset by lower revenues in debt securities and loans.
Total operating expenses decreased 2% year over year to $5.4 billion. Expenses moved down mainly due to decline in compensation and employee benefits expenses (down 3%).
Non-compensation expenses were almost flat compared with the prior-year quarter. Expenses included elevated level of brokerage, clearing, exchange and distribution fees, market development expenses, along with depreciation and amortization expenses, mostly offset by reduced other expenses, driven by lower net provisions for litigation and regulatory proceedings.
Strong Capital Position
Goldman exhibited a robust capital position in the reported quarter. As of Jun 30, 2017, the company’s Common Equity Tier 1 ratio was 12.5% under the Basel III Advanced Approach, highlighting the valid transitional provisions. The figure was down from 12.9% recorded in the prior quarter. The company’s supplementary leverage ratio on a fully phased-in basis was 6.3% at the end of the second quarter, down from 6.4% recorded in the prior quarter.
Adjusted return on average common shareholders’ equity, on an annualized basis, was 8.7% in the reported quarter.
Capital Deployment Update
During second-quarter 2017, the company repurchased 6.6 million shares of its common stock at an average price per share of $221.92 and a total cost of $1.47 billion.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to three lower. While looking back an additional 30 days, we can see even more downward movement.
At this time, Goldman Sachs’s stock has a poor Growth Score of F, however its Momentum is doing a lot better with an ‘A’. 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 D. If you aren’t focused on one strategy, this score is the one you should be interested in.
The company’s stock is suitable solely for momentum based on our styles scores.
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It’s no surprise that the stock has a Zacks Rank #4 (Sell). We expect below average returns from the stock in the next few months.