The Goldman Sachs Group, Inc. (GS), a leading global investment banking, securities, and investment management firm, is scheduled to release its quarterly earnings results on Tuesday, October 17, 2023, before the market opens. Analysts expect revenue and EPS for the third quarter (ended September 2023) to decline 7% and 32.8% year-over-year to $11.13 billion and $5.54, respectively.

The company is expected to report a steep third-quarter earnings drop as deal-making dries up and the bank retreats from a loss-making consumer business.

Such disappointing financial results would follow second-quarter profits that fell to a three-year low. Following a record 2021, the company’s performance has been subdued since last year as higher interest rates, prevailing economic uncertainty, and the war in Russia and Ukraine prompted companies to hold off on deal-making.

GS posted a fiscal 2023 second quarter of $10.90 billion, surpassing analysts’ estimate of $10.73 billion, but fell 8% year-over-year. The company’s profit missed analysts’ expectations amid write-downs tied to commercial real estate and the sale of its GreenSky lending unit.

GS’ second-quarter earnings per share were $3.08, down from $4.04 expected and a decline of 60% from the prior year’s quarter. While Citigroup Inc. (C) and Morgan Stanley (MS) also witnessed their profit declines, Goldman reported the largest drop among its peers.

The company disclosed a $504 million impairment tied to GreenSky and $485 million in real estate write-downs during the quarter.

“Our results were impacted by the challenging macro environment and in particular headwinds facing our specific mix of businesses,” said GS’ CEO Solomon during the previous earnings call. “Activity levels in many areas of investment banking hover near decade-long lows and clients largely maintained a risk off posture over the course of the quarter.”

There are some signs of life emerging in M&A, added Solomon. “It definitely feels better over the course of the last six to eight weeks than it felt earlier in the year,” he said. “I know this level of 10-year lows in investment banking activity is not going to be the normal on a forward basis.”

As per Solomon, winding down the company’s consumer lending business will free up capital and time to refocus on efforts that are core to its strategy.

Despite lackluster financial performance, GS’ Board of Directors approved a dividend of $2.75 per common share beginning in the third quarter of 2023. The company’s annual dividend of $11 translates to a yield of 3.56% at the prevailing share price. Its four-year average dividend yield is 2.21%. Its dividend payouts have grown at a CAGR of 27% over the past five years.

Moreover, the company has raised the dividend for 11 consecutive years.

Shares of GS have plunged 7.2% over the past month and 6.9% over the past six months to close the last trading session at $309.30. However, the stock has gained marginally over the past year.

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

Deteriorating Financials  

GS’ net revenue declined 8.2% year-over-year to $10.90 billion for the second quarter ended June 30, 2023. Its operating expenses increased 11.6% from the year-ago value to $8.54 billion. The company’s net earnings came in at $1.22 billion, a decrease of 100.6% from the previous year’s quarter.

Furthermore, the company’s earnings per common share declined 60.2% year-over-year to $3.08. Its total liabilities stood at $1.46 billion as of June 30, 2023, compared to $1.42 billion as of March 31, 2023.

Impressive Historical Growth

GS’ revenue and EPS grew at respective CAGRs of 5.6% and 21.1% over the past three years. In addition, the company’s total assets increased at a CAGR of 11.2% over the same period, while its common equity grew at a 10.3% CAGR.

Mixed Analyst Estimates

Analysts expect GS’ revenue to decrease 3.8% year-over-year to $45.56 billion for the fiscal year ending December 2023. The consensus earnings per share estimate of $24.29 for the ongoing year indicates a 19.2% year-over-year decline.

However, the company’s revenue and EPS for fiscal year 2024 are expected to grow 10.4% and 42.5% year-over-year to $50.32 billion and $34.61, respectively.

Mixed Profitability

GS’ trailing-12-month gross profit margin of 83.02% is 39.4% higher than the industry average of 59.55%. Its trailing-13-month CAPEX/Sales of 6.87% is 242.8% higher than the industry average of 2.01%. However, the stock’s trailing-12-month net income margin of 20.21% is 21.7% lower than the 25.81% industry average.

Further, the stock’s trailing-12-month ROCE and ROTA of 7.75% and 0.56% are lower than the industry averages of 11.41% and 1.15%, respectively.

Mixed Valuation

In terms of trailing-12-month Price/Cash Flow, GS is currently trading at 4.44x, 29.4% lower than the industry average of 6.29x. However, the stock’s forward non-GAAP P/E and Price/Sales of 12.73x and 2.36x are 45.2% and 8.4% higher than the industry average of 8.77x and 2.17x, respectively.

POWR Ratings Reflect Uncertainty

GS’ mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a C grade for Quality and Value, consistent with its mixed profitability and valuation, respectively.

In addition, GS has a C grade for Stability, justified by its 24-month beta of 1.09.

Within the Investment Brokerage industry, GS is ranked #12 out of 20 stocks.

Beyond what I have stated above, we have also given GS grades for Sentiment, Growth, and Momentum. Get all GS’ POWR Ratings here.

Bottom Line  

Despite slightly exceeding analysts’ revenue estimates in the last reported quarter, the company posted profit below analysts’ expectations amid write-downs tied to commercial real estate and the sale of its fintech unit Greensky. Unlike more diversified rivals, GS gets most of its revenue from volatile Wall Street activities like trading and investment banking.

That could lead to underperformance when markets don’t cooperate. Amid a challenging environment due to rising interest rates, economic uncertainty, and geopolitical instability weighing on its deal-making and trading, the bank seems headed to report a steep earnings drop in the third quarter.

Given its poor financials, mixed valuation and profitability, and bleak near-term prospects, it could be wise to hold GS and wait for a better entry point in the stock.

Stocks to Consider Instead of The Goldman Sachs Group, Inc. (GS)

Given its uncertain short-term prospects, the odds of GS outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these two A-rated (Strong Buy) stocks from the Investment Brokerage industry instead:

BGC Partners, Inc. (BGCP)

Oppenheimer Holdings, Inc. (OPY)

To explore more A and B-rated brokerage stocks, click here.

What To Do Next?

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GS shares rose $1.66 (+0.54%) in premarket trading Monday. Year-to-date, GS has declined -7.83%, versus a 14.08% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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