Here’s what we hope could be a helpful collection of analysts’ comments on Goldman Sachs third-quarter results.
The major takeaway is that there’s still a reasonable amount of concern about whether the bank can continue its strong performance in places like Fixed Income Currencies and Commodities. There’s also a lot of talk about the amount of compensation the bank is paying its staff.
To start off with, though, here are thoughts of JP Morgan analysts Kian Abouhossein, Cormac Leech and Delphine Lee. JP Morgan, incidentally, is the only bank of those presented below to not have a `buy’ recommendation on Goldman, instead it stands at ‘neutral’ citing the first signs of margin pressure. Here’s what the analysts say:• Diluted 3Q09 ‘clean’ EPS was $4.31 after reversing volatile principal investment gains ($1.3bn), losses on own debt (-$0.3bn) and other 1-off costs (-$0.2bn).
• We upgrade our 2009E EPS estimate by 9% from $16.00 to $17.39 reflecting the larger than expected Principal investment gains of $1.3bn in 3Q09. Our 2010E and 2011E EPS numbers remain unchanged. We re-iterate our ‘Neutral’ recommendation and $180 target price (SOP based, Dec-10E)
• Our 2009E EPS assumes that the ratio of compensation to revenue will be 44% for the year overall, with an adjustment in the fourth quarter (implying 4Q09E comp to revenue 34% vs. 43% in 3Q09). In both 2010E and 2011E we assume compensation to net revenue of 48%.
• At the 3Q09 results, management highlighted early signs of margin pressure, particularly in flow products such as FX and Rates but see potential for this margin pressure to be offset by increased client activity on continued economic growth.
• In our opinion, GS i) has the strongest and cleanest capital position in terms of Tier I and leverage ratio in the peer group- JPM 2011E core tier I of 13.4% (post 2010E $12bn buyback); ii) fully marks-to-market the balance sheet rather than accrual accounts; iii) has one of the strongest Fixed Income franchises globally — the 2009E relative ‘sweetspot’; and importantly, iv) management has a proven record of quickly reallocating resources to account for changes in the markets.
• However, we remain ‘Neutral’ on valuation, with GS trading 4% above our TP of $180, and trading at P/NAV of 1.6x in 2011E with a RoNAV of 14.6% 2011E ex own debt. Among the IBs we prefer CS (OW) and MS (OW), for equity gearing, through private banking, rather than fixed income, see Global Investment Banks : Switching preference from IBs to Credit banks on regulatory changes. We reiterate our preference for credit exposed banks – ie moving from markto- market assets into lending accrual book gearing European banks : Model portfolio in context of potential capital raising.
From here on in, however, it’s all about compensation. Or more specifically, Goldman’s decision to lower its compensation ratio to 43 per cent in the quarter. Paying bankers less, it turns out, is not just good for Goldman’s public image, it’s also good for its headline numbers.
Here’s Citi’s Keith Horowitz, Craig Singer and Steve Foundos:
• 3Q Performance Best-In-Class — GS reported 3Q EPS of $5.25 vs our $4.20 est. Strong principal inv gains and sooner-than-expected drop in the comp ratio (43% vs our 49% est) explained most of the beat. GS again posted very strong FICC (~$6.4 bil on core basis, down 19% q/q) and Equity trading performance ($2.8 bil, down 13% q/q) despite low levels of leverage (13.5x gross vs 22x l/t avg) seasonal slowness and narrowing bid/ask spreads. I-Banking fees were soft, but better-than-expected. One of the only disappointments was Security Svcs (down 48% y/y), which is seeing weakness in sec lending. Mgmt noted performance was primarily client flow driven, with little benefits from “positioning” and “not significant” contribution from equity principal strategies.
• One-timers Disclosed Totaled ~$750 mil — 3Q was relatively clean with $461 mil of revenue marks ($275 mil DVA hit, $120 mil CRE loan loss and $66 mil CRE equity hit) plus ~$300 mil of expense one-timers ($200 mil GS foundation contribution, $36 mil litigation cost and an est $70 mil impairment on direct real estate assets). Altogether these items weighed on EPS by 50-60 cents.
• IB Pipeline Up — 3Q will likely mark the cyclical trough for I-banking fees, given growing equity and M&A pipelines. We see a 33% increase in IB fees in 4Q and 45% y/y increase in 2010 driven by resurgent M&A/advisory.
• Raising Estimates and Target Price — Given 3Q beat and 4Q comp accrual adjustment, we raise our 4Q estimates 50 cents to $5.50 and raise our 2010 estimate 25 cents to $19. Given higher estimates and a lower cost of equity assumption (12.0% from 12.5% due to lower risk aversion in system) we raise our price target from $215 to $240, or 1.9x our 2010 TBV/shr est of $124.
And Bank of America Merrill Lunch’s Guy Moszkowski, Sandra Goldschneider and Gian Kull:
• Resilient trading; IB weak but backlogs up
GS printed EPS of $5.25 vs our forecast of $4.56, cons of $4.24. EPS would have been at cons with a 48% comp ratio and given nearly 5% “share creep” which occurred (since share buyback would be premature). Trading benefited from strong activity, attractive bid/offer spreads and the breadth of GS franchise. IB remained weak, as expected, though mgt noted higher backlogs/increased strategic dialogue. With shares up 7% over last 2 weeks (+31% since the end of 3Q), there was “selling on news”, after expectations got a bit aggressive.
• Expect more comp true-up in 4Q
Comp ratio was 43%, vs. forecast 49%, so some of normal 4Q “true-up” came in 3Q probably in effort to be responsive to public opinion, as did $200mn charitable contribution. We cut 4Q09E comp ratio to 20% from 25% which brings full year ratio to 41% (vs ~46.5% historical average). This seems fair given expected FY09 revenues of $46.2bn, just higher than best-ever 2007 revenue of $45.9bn when comp was 43.9%. We believe that in this environment of heightened scrutiny 41% comp ratio is adequate.
• Maintain 4Q09E of $7.17 and ‘10E $20.83, PO to $234 from $216 We maintain our above consensus 4Q09E and 2010E. PO goes to $234 from $216 on 1.8x BVPS 2010E of $137 which we haircut by 5% to account for market fluctuations
And finally, Deutsche’s Michael Carrer and Matthew Klein:
•A solid quarter and favorable outlook, but high expectations
Goldman reported results that beat expectations ($5.25 vs. our/street estimates of $4.50/$4.24), but given the mix of the beat (high principle investments and a lower comp ratio, partially offset by elevated non-comp and tax rate) and very high expectations heading into the quarter (particularly post JPM’s strong results), investors were unimpressed. That said, given our outlook and the current valuation, we continue to view the near term and long term outlook as attractive and maintain our Buy rating.
•Comp lever likely to boost the near term outlook
In terms of the near term outlook, we expect book value growth and the ROE to remain healthy, driven by a decent capital markets environment and a lower compensation ratio, partially offset by some seasonality in 4Q (due to the inclusion of December in the fiscal year and the potential for some moderation in industry activity and risk taking).
•Long term outlook remains favorable
As we head into 2010, as long as the improving macro trends hold, we continue to expect Goldman to generate attractive book value growth and ROEs (~18%) due to rising investment banking, security services, and asset management revenues, a favorable trading outlook (as narrowing FICC spreads are offset by rising volumes), and the potential for some capital re-deployment.
More as we get it.
Related links:
Goldman’s friendly and finessed results – FT Alphaville
Gawker’s crowd-sourced Goldman Sachs witchhunt – FT Alphaville
Mystery Meredith Whitney Goldman downgrade – update – FT Alphaville