Goldman Sachs Group Inc (GS) Earnings & Key Problems – Bove

Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, breaks down Goldman Sachs’s first quarter earnings results.

Goldman Sachs Group Inc (GS) Goldman Sachs reported first quarter earnings of $2.68 per share. This is $0.33 per share below my estimate but $1.41 per share above fourth quarter results. The new earnings forecasts are as follows: a) the 2016 estimate is being adjusted to $15.63 from $15.58; b) the 2017 estimate is being increased to $18.56 per share from $18.31 per share; and c) the 2018 estimate has been advanced to $19.60 from $19.54 per share.

Goldman Sachs Group Inc (GS) Q1 Earnings

As expected, Goldman Sachs reported very weak earnings in the first quarter. The first quarter is expected to be seasonally strong but it was not. Year-over-year investment banking revenues fell by 23%; investment management was down by 16%; market making was off by 53%; and overall revenues fell by 40%.

Operating expenses were reduced by 29% and the tax rate cut to 28.0%. This was not enough. Net income fell by 60%.

Not all was bleak, however. On a quarter-over-quarter basis, Commissions and fees rose by 14%; market making gained by 19%, and net interest income gained by 26%. These gains ameliorated the decline in revenues to 13% with operating expenses declining by 23%. Thus, pretax earnings actually gained by 47% in the quarter.

Goldman Sachs Group Inc (GS)

Taking a cue from the linked quarter result, it is being suggested here that Goldman may have reached the bottom in the fourth quarter and is now edging its way back up from that extreme low. Based on assumptions that money supply will continue to grow; the economy will limp higher; and interest rates are likely to rise before year-end, it is quite possible that Goldman’s earnings could rise quarter-by-quarter for the remainder of the year.

The key problem with Goldman as I see it has nothing to do with the way the company operates its business. Using an analogy, this company makes the best magnetic cores and vacuum tubes even though the world has digitized and is using the “cloud.”

I can find no fault with Goldman’s business acumen. In the past decade it has adjusted its balance sheet and fine-tuned its business models to yield the very best in each. Yet, revenues and earnings per share are down and the stock is selling at the average price of 2006.

The world has changed and Goldman is on the wrong side of that change. Thus, being the best is wonderful but it does not necessarily create wealth for shareholders. It raises the question as to whether this is another of the great American companies that have lost their way because they have been unwilling to consider transformational change.

The time for this continued and slow erosion in value must stop. Management needs to think strategically and take bold moves to insert itself on the successful side of the change in the financial sector.

Goldman Sachs Group Inc (GS)


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