Is Goldman Sachs (GS) Q1 Performance a Green Light for Investors?

April 19, 2024 at 03:35 AM EDT

The Goldman Sachs Group (GS) comfortably topped analysts’ earnings and revenue estimates in the first quarter. After its solid first-quarter performance, should investors consider adding the stock to their portfolio now? Keep reading...

The Goldman Sachs Group, Inc. (GS) reported its first-quarter results on April 15. The company comprehensively surpassed Wall Street’s EPS and revenue estimates. In this piece, I have discussed why it could be prudent to wait for a better entry point in the stock now despite the earnings and revenue beat.

For the first quarter, GS’s EPS was 34.1% above the consensus estimate, and its revenue was 9.9% higher than the analysts' estimates. GS’ first-quarter profit and revenue topped analysts’ expectations, driven by solid gains in trading and investment banking revenue. GS’ strong earnings marked two consecutive quarters of double-digit earnings gains. However, revenue growth decelerated over the past four quarters.

GS’ investment banking fees rose 32% year-over-year to $2.08 billion, driven by higher equity and debt underwriting. Meanwhile, the bank’s global banking and markets revenue jumped 15% over the prior-year quarter to $9.73 billion. Its fixed-income trading revenue rose 10% year-over-year to $4.32 billion, driven by the rise in mortgage, foreign exchange, and credit trading and financing.

Moreover, its Asset & Wealth Management and Platform Solutions segments’ revenues increased 18% and 24% year-over-year to $3.79 billion and $698 million, respectively. Also, in Asset & Wealth Management, its assets under supervision rose to a record of $2.8 trillion in the first quarter.

The bank allocated $318 million in provisions for credit loss in the first quarter, compared to a benefit of $171 million in the year-ago quarter, due to potential defaults in wholesale loans and credit cards. The bank expects M&A (Mergers and Acquisitions) and debt underwriting to continue this year. GS’ stock has gained 33.5% over the past six months and 20.7% over the past year to close the last trading session at $403.11.

Here’s what could influence GS’ performance in the upcoming months:

Mixed Financials

GS’ total net revenues for the fiscal first quarter ended March 31, 2024, rose 16.3% year-over-year to $14.21 billion. Its net earnings applicable to common shareholders increased 27.3% over the prior-year quarter to $3.93 billion. The company’s standardized CET1 ratio came in at 14.7%, compared to 14.4% in the year-ago quarter. Also, its EPS came in at $11.58, representing an increase of 31.7% year-over-year.

In addition, its annualized return on average common shareholders’ equity (ROE) was 14.8%, up 3.2 percentage points year-over-year. Its annualized return on average tangible common shareholders’ equity (ROTE) was 15.9%, up 3.3 percentage points over the prior-year quarter.

On the other hand, its net interest income declined 9.7% year-over-year to $1.61 billion.

Commenting on GS’ first-quarter performance, Chairman and CEO David Solomon said, “Our first quarter results reflect the strength of our world-class and interconnected franchises and the earnings power of Goldman Sachs. We continue to execute on our strategy, focusing on our core strengths to serve our clients and deliver for our shareholders.”

Favorable Analyst Estimates

Analysts expect GS’ fiscal 2024 EPS and revenue to increase 56.8% and 9.7% year-over-year to $35.87 and $51.06 billion, respectively. Its fiscal 2025 EPS and revenue are expected to grow 11% and 3.3% year-over-year to $39.80 and $52.76 billion, respectively.

Similarly, analysts expect GS’ EPS and revenue for the quarter ending June 30, 2024, to increase 180.5% and 15.2% year-over-year to $8.64 and $12.55 billion, respectively.

Mixed Profitability

In terms of the trailing-12-month gross profit margin, GS’ 83.49% is 39.4% higher than the 59.91% industry average. Likewise, its 4.96% trailing-12-month Capex / Sales is 146.4% higher than the industry average of 2.01%.

On the other hand, its 20.15% trailing-12-month net income margin is 14.9% lower than the 23.66% industry average. Likewise, its 0.03x trailing-12-month asset turnover ratio is 86.4% lower than the 0.21x.

Mixed Valuation

In terms of forward Price/Sales, GS’ 2.71x is 13% higher than the 2.40x industry average. Its 11.24x forward non-GAAP P/E is 12.9% higher than the 9.96x industry average. Likewise, its 1.21x forward Price/Book is 21% higher than the 1x industry average.

On the other hand, in terms of forward non-GAAP PEG, GS’ 1.06x is 13% lower than the 1.22x industry average.

POWR Ratings Reflect Uncertainty

GS has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. GS has a C grade for Value, which is consistent with its mixed valuation. It has a C grade for Stability, in sync with its 1.42 beta.

GS’s mixed profitability justifies its C grade for Quality.

GS is ranked #7 out of 20 stocks in the Investment Brokerage industry. Click here to access GS’s Growth, Momentum, and Sentiment ratings.

Bottom Line

GS started the year strong, with sharp increases in profits and revenue in the first quarter, driven by a resurgence in debt underwriting and deal-making activities. The bank said it was operating in a complex operating environment, but it believes that it is in the early stages of a reopening of the capital markets, which bodes well for the company, as its fortunes depend on the stock and bond markets’ performances.

However, a strong U.S. jobs market and rising inflation could mean that interest rates remain higher for longer. The Federal Reserve looks highly unlikely to cut interest rates at its upcoming policy meeting due to a lack of further progress on inflation.

Many economists are considering the possibility of no rate cuts at all this year. This, along with escalating geopolitical tensions, could negatively impact the capital markets as deals and M&As could take a pause.

On the other hand, if inflation starts easing again, the Fed could proceed with rate cuts, thereby boosting corporate confidence in striking deals and raising money.

Given its mixed financials, stability, profitability, and valuation, it could be wise to wait for a better entry point in the stock.

How Does The Goldman Sachs Group, Inc. (GS) Stack Up Against Its Peers?

GS has an overall POWR Rating of C, equating to a Neutral rating. You may check out these B-rated stocks within the Investment Brokerage industry: Oppenheimer Holdings Inc. (OPY), Piper Sandler Companies (PIPR), and Stifel Financial Corp. (SF). For exploring more Buy-rated Investment Brokerage stocks, click here.

What To Do Next?

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GS shares were unchanged in premarket trading Friday. Year-to-date, GS has gained 5.24%, versus a 5.42% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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