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Dow-30 Earnings: Goldman Sachs - Third Quarter 2013
Dow-30 component Goldman Sachs (GS – Free Goldman Sachs Stock Report), a global leader in the field of investment banking, securities, and investment management, and a new member of the Dow 30, has reported a significant decline in net revenues for the September period. The stock fell modestly on the news, as the revenue figure of $6.72 billion was significantly below what had been expected (our call was $10.75 billion). However, diluted earnings per share came in at $2.88, which was roughly in line with our $2.90 estimate. Meanwhile, the board of directors has raised the quarterly dividend by 10%, to $0.55 per common share. However, that still leaves the dividend yield significantly below the Value Line median of 2.1%.
The revenue disappointment came as a result of slow client activity, in part due to uncertainty over Congressional budget quarrels and Federal Reserve tapering concerns. The drop was evident across most of the company's segments. The big decline in revenues came in the Institutional Client Services segment, which tumbled 32% year over year, largely due to a 44% plunge in fixed income, currency, and commodities client execution. The decline was primarily driven by lower revenues in mortgages and interest-rate products, on lower levels of activity. Meanwhile, Investment Banking revenues were flat year over year, though they were 25% lower than in the second quarter. The segment was helped by the underwriting business, which actually rose due to higher net revenues from initial public offerings.
In light of the substantial revenue disappointment, the 2% year-to-year increase in share net was a pleasant surprise. This was due, in large part, to the company's success in reducing expenses. Compensation and benefits expenses were down 35% year over year. Non-compensation expenses declined as well, led by a drop in insurance reserves due to the sale of the company's Americas reinsurance business and lower expenses related to consolidated investments. The per-share comparison was also helped by a lower share count, as the company has been repurchasing stock at a solid clip over the past few years.
We are leaving our full-year 2013 and 2014 earnings-per-share estimates unchanged. However, we now project a year-over-year decline in revenues for 2013. We expect the top line to recover in 2014, particularly if a durable resolution of the long-term U.S. budget woes is reached early next year, as that would bring a greater degree of certainty to the markets.
These shares, which weakened modestly on the earnings release, have solid long-term appreciation potential, as they currently trade at a conservative P/E ratio, and the company appears set for double-digit annual earnings growth over the next 3 to 5 years.
About The Company:The Goldman Sachs Group is a global investment banking and securities firm. It operates in four business segments: Investment Banking (15% of 2012 revenues); Institutional Client Services (53%); Investing & Lending (17%); and Investment Management (15%). Last year, 41% of the company’s revenues came from outside of the Americas.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.