Goldman Sachs
Goldman has been an outperformer among financial stocks which is somewhat surprising as the expectation was that rising rates would be good for lending and commercial banking, while it would likely put a damper on IPO and M&A activity. Instead, it seems that banks are negatively affected by a sharp rise in rates as it leads to less mortgage demand and more uncertainty about a recession as banks also increased loan loss reserves. And, the sharp rise in rising rates has slowed the IPO market and M&A activity, but it caused a surge in market volatility which means increased profits for trading desks.
Inside the Numbers
In Q1, Goldman Sachs reported earnings per share of $10.76 which beat estimates of $8.89 per share. This was a 42% drop from last quarter when the robust IPO market and low-rate environment led to record profits. Revenue beat expectations at $12.9 billion vs estimates of $11.8 billion but were down more than 27% from last year.
Management said that the invasion of Ukraine was a headwind as new equity issuance dropped to zero, and clients stopped taking on risk. Due to its trading desk, the company seems to have done a better job than other Wall Street banks of profiting from higher volatility.
Fixed income desk generated $4.7 billion in revenue, which was higher than estimates by $1.7 billion. Equities also beat estimates by producing $3.2 billion vs $2.6 billion. Investment banking revenue declined by 36% to $2.4 billion.
Looking ahead, Goldman Sachs seems to have digested the rise in rates much better than expected and than its peers. It's likely that the worst of the rate hike cycle is over in that the market now expects between 300 and 350 basis points of hikes into 2023. Any relief in inflation could slow this timeline and boost capital markets.
Despite its nearly 20% drop from highs and earnings decline, Goldman remains quite cheap with a forward P/E of 8.5 and 2.4% dividend yield. The company also has a huge cash haul of nearly $50 billion which makes the stock even cheaper. Despite near-term headwinds, Goldman should be bought on the dip.
