Goldman (GS) Up 11.6% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Goldman Sachs (GS). Shares have added about 11.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Goldman due for a pullback? Before we dive into how investors and analysts have reacted as 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 Q2 Earnings Top Estimates, Revenues Dip Y/Y

Goldman’s second-quarter 2022 earnings per share of $7.73 have surpassed the Zacks Consensus Estimate of $6.99. However, the bottom line fell 48.5% from the year-earlier quarter.

While strength in the FICC, wealth management, and consumer banking businesses acted as a tailwind, the bank’s results were hurt by lower debt and equity underwriting revenues.

Net earnings of $2.93 billion decreased 47% from the prior-year quarter.

Revenues Dip, Expenses Decline

Net revenues of $11.86 billion fell 23% from the year-ago quarter. Nonetheless, the top line beat the Zacks Consensus Estimate of $11.05 billion.

Total operating expenses declined 11% year over year to $7.63 billion.

Provision for credit losses was $667 million against a net benefit of $92 million in the prior-year quarter.

Segmental Performance Mixed

The IB division generated revenues of $2.13 billion in the reported quarter, down 41% year over year. Results reflect a decline in underwriting revenues, partially offset by a rise in corporate lending revenues that improved 121% from the prior-year quarter.

The Global Markets division recorded revenues of $6.46 billion, up 32% year over year. The uptick indicated a rise in net revenues in FICC (up 55%) and equities revenues (up 11%).

The Consumer and Wealth Management division’s revenues were $2.17 billion, 25% higher than the year-ago figure. Increased revenues from wealth management (up 13%) and consumer banking (up 67%) resulted in the upsurge.

The Asset Management division recorded revenues of $1.08 million, indicating a 79% year-over-year decline. The downside resulted from notably lower net revenues in equity investments, as well as lending and debt investments.

Firmwide assets under supervision were $2.50 trillion, up 8.2% year over year.

Capital Position Mixed, Profitability Declines

As of Jun 30, 2022, the standardized Common Equity Tier 1 capital ratio was 14.2%. The figure was down from the prior-year quarter’s 14.4%. The company’s supplementary leverage ratio was 5.6% as of Jun 30, 2022, down from the prior-year quarter figure of 5.5%.

Also, return on average common shareholders’ equity (on an annualized basis) decreased 13.1 basis points year over year to 10.6% in the reported quarter.

Capital Deployment Update

In the quarter under review, Goldman returned $1.22 billion of capital to common shareholders. This included $500 million in share repurchases and common stock dividends of $719 million.

Medium-Term and Long-Term Financial Targets

At a conference held in February 2022, Goldman’s management provided an update on its medium-term (three-year period) and long-term financial targets. Those are as follows:

The company increased medium-term firmwide ROE target to 14-16% from the previous 13% and return on tangible common equity to 15-17% from more than 14% stated earlier.

Also, the firm’s efficiency ratio target of 60% has been reiterated. The company already realized $1 billion of expense efficiencies from 2019 to 2021 of the target $1.3 billion.

In the Asset Management segment, organic traditional long-term net inflows are projected to reach $350 million by 2024, up $100 billion from the previous target. Also, $225 billion worth of gross alternative fundraising is anticipated by 2024 from the prior target of $150 billion.

Goldman announced new targets of more than $10 billion in firmwide management and other fees. Of this, more than $2 billion in alternatives management fees are expected for 2024.

In the IB segment, management expects transaction banking revenues to reach $750 million, down from the prior mentioned $1 billion. Deposits of more than $100 billion by 2024 are expected.

Revenues in the Consumer segment are projected to reach $4 billion by 2024. This will likely be supported by more than $150 billion in deposits and loans/cards balance exceeding $30 billion by the same year.

Goldman aims to reduce its stress capital buffer toward 5% from the current capital requirement of 6.4%. Also, the company noted that the global systematically important banking buffer (G-SIB) surcharge will increase 50 basis points (bps) to 3%, effective 2023, and another 50 bps to 3.5%, effective 2024, from the current G-SIB 2.5%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

The consensus estimate has shifted -5.01% due to these changes.

VGM Scores

At this time, Goldman has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Goldman has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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