The Goldman Standard
In the last earnings call, Goldman Sachs (NYSE:GS) clearly demonstrated its incredible growth potential and set the tone for a highly profitable 2013.The bank reported a blow out quarter, bolstering its reputation as one of the best investment banking firm on Wall Street.
Goldman Sachs reported net income of $2.89 billion, or $5.60 per share, almost 3X previous year’s results. Obviously, with such a stellar announce, the Company greatly surpassed consensus estimate of $3.66 a share.
Goldman Sachs handsomely profited as investment banking and financial advisory revenues surged. Revenue for Q4 rose to $9.24 billion, 53% higher than in the same period a year ago. The bank recorded strong results from debt and equity underwriting, and its trading units. Additionally, investment and lending divisions of the bank experienced larger than expected gains.
“Oopa Goldman Style,” was the title of a report written by Glenn Schorr, a Nomura analyst, carrying the sort of enthusiasm not seen from financial analysts’ since before the financial crisis. The quarter, Mr. Schorr said, reminded him of the “old days” and should give investors confidence of Goldman’s earnings potential.
Market IQ’s proprietary Fundamental metrics give Goldman Sachs an Outperform rating. Market IQ places Goldman Sachs in the top right quadrant of the Quality - Value chart (see below), indicating high Quality and Investment Value.Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Charles Schwab Corp. (NYSE:SCHW), TD Ameritrade Holding (NYSE:AMTD), and Nomura Holdings Inc. ADS (NYSE:NMR).
Goldman’s Qualitative strength can be seen in multiple areas such as its Earnings growth and Return on Equity
- Over the trailing 12 months Goldman Sachs has been able to increase its Earnings by an impressive 68.28%, which is significantly higher when compared to its peers.
- The firm has a current Return on Equity of 10.7%. For the record, Goldman’s Return on Equity was 5.8% in 2011. Very Impressive.
Based on Market IQ’s Valuation metrics, Goldman Sachs is cheaper than 81% of its peers and offers good upside potential.
Estimate Momentum, which is the change in analyst estimates over time, has also drifted higher post Goldman’s blow out Q4 2012 earnings - EPS estimate for fiscal year 2013 has increased from $12.94 per share 90 days ago to a current estimate of $13.49 per share.
The uncertainty in the implementation of the Volker rule 1 further helps Goldman’s cause - Unlike banks like JP Morgan Chase (NYSE:JPM) and Bank of America(NYSE:BAC) that have commercial banking operations, Goldman relies heavily on results in areas like trading. Given the lofty markets 2, profits from Goldman’s proprietary trading unit are likely to help increase the bank’s bottom line.
However, not everything has been rosy for the Investment Banking giant. The bank did not fare too well in the Federal Reserve’s latest stress test - Goldman’s Tier One common ratio 3 saw a drop to 5.8 % under a hypothetical stress scenario in 2014, slightly ahead of the 5% benchmark set by the Federal Reserve.
The main purpose of the Fed’s stress tests was to examine how institutions would fare under a “severely adverse” 4 global economic scenario. The Fed’s scenario projected Goldman to suffer a total loss of over $20 billion under “severely adverse” conditions. However, despite the drastic deterioration of capital levels in Fed’s doomsday scenario, investors should note that Goldman Sachs posted similarly depressed capital levels last year, yet, the stock more than doubled the return of the S&P 500 in 2012.
Make no mistake, Goldman Sachs is viewed as the bellwether for the rest of the financial sector. Time and time again, the bank has proved itself. With its outstanding financial results, growth prospects, and strong Fundamentals, Goldman Sachs may be a good long - term bet.
1Volcker rule is a part of the Dodd-Frank financial regulatory overhaul that restricts banks from making bets with their own funds. The implementation of the rule has faced great reluctance from the financial community since it will reduce earnings potential for investment banks. The Volcker Rule is not likely to be in effect until July 2014 with some industry lobbyists pushing for extension beyond that date.
2The S & P 500 Index gained 10.5% in Q1 2013.
3Tier 1 ratio is the ratio of common equity to overall assets.
4 Severely adverse economic conditions reflect a scenario in which the unemployment rate reaches 12.1 percent, equity prices drop more than 50 percent, and home prices fall 20 percent.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.