Goldman’s Income Sinks But Stock Still Has 20% Upside

Goldman Sachs (NYSE:GS) announced its performance figures for the second quarter of 2012 on Tuesday. ^[1] Although the global investment bank ended up with substantially lower figures compared to the previous quarter, it managed to beat grimmer analyst expectations for the slow economic period. Goldman ended up with lower revenues for almost all of its business units, with its debt and equity trading desks showing the sharpest drops. We are reducing our price estimate for Goldman’s stock from $128 slightly lower to factor in the impact of weak performance in this quarter which will likely be extended for a good part of the remaining year. Our new target will still be around at a premium of about 25% to the current market price. We attribute this difference to the significant pessimism among investors toward investment bank stocks given the deteriorating economic condition in several European nations and a sizable exposure that these investment banks have to these economies.

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High Volatility Gets the Better Out of Goldman, Again

Global capital markets were in a state of flux over the quarter driven by conditions similar to those seen during the second half of 2011. It must be remembered that Goldman ended up with its second quarterly loss ever during that period. The bond trading business of investment banks is expected to be impacted the most by the turmoil in Eurozone. This shows through clearly in Goldman’s revenue figures toward which its FICC trading unit regularly contributes between 30% and 35%.

Revenues for the bank’s client-driven debt trading business fell 37% over the previous quarter – roping in just under $2.2 billion compared to $3.5 billion in Q1 2012.

Commitment to Slash Costs Further Should Unlock Value in the Future

Goldman’s focus on driving down costs in an environment where revenue sources are becoming scarce should help its bottom-line numbers in subsequent quarters. The bank’s operating expenses for the quarter were $5.2 billion – a good 23% lower than that for the previous quarter and 8% lower compared to the figure for the same quarter last year. And, the fact that Goldman now intends to reduce annual expenses by $1.9 billion by the end of the year instead of the $1.4 billion it announced earlier is good news.

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1. Goldman Sachs Reports Second Quarter Earnings, Goldman Sachs Press Releases, Jul 17 2012 [↩]