Analysts are starting to respond to the blow-out first quarter figures from Goldman Sachs with wait for it…a flurry of ‘buy’ recommendations.
In fact, heading into the results the number of ‘buy’ ratings on Goldman was at a five year high, according to Bloomberg. And there’s seemingly nothing in Tuesday’s statement that looks set to change that.
Merrill Lynch says the key driver of the beat was another strong performance from Goldman’s Fixed Income, Currency and Commodities (FICC) business. (That’s the incomprehensible black box part of the bank in case you were wondering).
The key revenue-surprise driver vs. our model was Trading, in both FICC and Equities, where net revenues were considerably above forecast despite only 4% increase in assets and markets that were not particularly volatile. The firm noted that bid-offer spreads in FICC were “tighter” than a year ago, but results reflected less losses than in the yearago period. In Equities, commissions were weak (below q1:09) but derivatives and other principal revenues were strong
The results are clearly exceptional and the 20% ROE belies the 1.3x P/B ratio, which discounts only 13% long-term ROE. But the SEC’s lawsuit announced Friday, and the potential for regulatory change that could make derivatives trading less lucrative, drive uncertainty. This said, we continue to find GS an attractive value.
Deutsche Bank also touches on the fraud charges, but retains a buy recommendation:
Goldman reported operating EPS of $5.59, ahead of our/Street est. of $4.25/ $4.01. The beat was primarily driven by higher FICC and equity trading revs and a lower than expected comp ratio. Despite the beat in the qtr, the industry regulatory headwinds & the recent fraud charge by the SEC are likely to limit the near term upside in the stock. Despite the near term headwinds, given GS’s strong positioning, improving activity levels, valuation, and lower comp ratios for the industry, we continue to like the longer term risk/reward as we get regulatory clarity & maintain our Buy.
Glen Schorr at UBS reckons Goldman is in a good place if it can get past this SEC suit:
While everyone’s obviously focused on the SEC issue, the quarter was strong & similar to other IBs, heavily weighted towards trading as Ibanking was down (but pipelines are strong) and asset mgmt & securities services were sluggish. Comp ratio was a few hundred bps lower than expectations at 43% (+35-45 cents vs. estimates), but revenues were very strong at $12.8bn and that might be the new norm. Anyway, 20% ROE, 17% annualized book growth and really strong Tier 1 common shows GS is in a good place if they can get past this SEC suit.
Keith Horowitz at Citigroup is also impressed by the fall in Goldman’s compensation ratio:
Overall compensation ratio was 43% vs our 48% estimate, which drove $0.70 of the EPS upside vs our estimate. Management noted the investment banking backlog was unchanged vs 4Q09. See Figure 1 for summary of actual vs estimates
He also picks up on the fact that Goldman has started repurchasing shares and that its capital levels remain strong.
GS repurchased 13.2 mil shares, mostly offset by employee stock issuance (which is a typical historical pattern for GS). Capital levels remain strong with the Tier 1 common ratio of 12.4% up from 12.2% in 4Q and the Tier 1 capital ratio (Basel I) of 15.0% is flat w/ 4Q.
Meanwhile, Nomura highlights the contribution made by Goldman’s Principle Investments division.
A significant part of the beat was also driven by the principal investments division where GS generated net gains of $760m from corporate principal investments offsetting losses from the ICBC stake. We had been assuming a 0 contribution from principal investments and adjusting for these net revenues, the EPS would have been lower by 59c.
In summary, Ticonderoga Securities says that Goldman is managing to generate great returns without drastically increasing the size of its balance sheet.
Book value increased 4.3% to $122.52 despite a $2.3 billion buyback. Leverage was flat at 12x. ROA of 1.5% was higher than any quarter last year. In our view, this means GS is making great returns without drastically increasing the balance sheet. We view this as very bullish. We expect full year comp. to trend closer to 2009 levels. Accordingly, we believe there is likely a bias higher to estimates. Given FICC trends in April, we believe there is probably a revenue upward bias as well. We believe it will be an uphill battle fighting the SEC and potential other claims. However, we believe fundamentals should prevail over time. Reiterate Buy. Estimates under review.
Indeed, Goldman’s VAR fell quarter-on-quarter, as this table from the results statements shows.
Oddly, in spite of all this positivity, shares in Goldman have opened lower. They were down 2 per cent at $162 at the time of writing.
Related links:
Goldman Sachs profits nearly double – FT
AIG eyes action on Goldman deals – FT