Goldman Sachs (NYSE: GS) is scheduled to report its fiscal Q3 2021 results on Friday, October 15. We expect Goldman Sachs to report mixed results, with revenues topping the consensus estimates and earnings missing the expectations. The bank outperformed the street expectations in the last quarter, with revenues increasing by 16% y-o-y to $15.4 billion. The growth was because of higher investment banking and asset management revenues, partially offset by negative growth in the sales & trading due to lower FICC (Fixed income, Currency, and Commodity) trading revenues. Further, the firm’s adjusted net income received a major boost in the quarter. This was partially driven by higher revenues, and partially due to favorable reduction in provisions for credit losses and lower operating expenses as a % of revenues. That said, we expect the sales & trading to continue to suffer in the third quarter. Further, the investment banking revenues are likely to normalize due to recovery in the economy, although it will still dominate the results.
Our forecast indicates that Goldman Sachs’ valuation is $406 per share, which is 5% above the current market price of close to $387. Our interactive dashboard analysis on Goldman Sachs’ Earnings Preview has more details.
(1) Revenues expected to be slightly ahead of the consensus estimates
Goldman Sachs’ revenues for full-year 2020 were $44.6 billion – up 22% y-o-y, mainly driven by a 24% y-o-y growth in investment banking and a 43% jump in sales & trading businesses, partially offset by an 11% drop in asset management revenues.
- The bank generates close to 61% of the total revenues from sales & trading and investment banking combined. However, due to the effect of the Covid-19 crisis, which increased the trading volumes and underwriting deal volumes in the market, the revenue share improved to 69% in 2020. This translated into a 24% y-o-y growth in investment banking to $9.4 billion, followed by a 43% jump in sales & trading to $21.2 billion. The growth momentum in investment banking and sales & trading businesses continued in the first quarter of 2021. However, the second quarter witnessed some dip in the sales & trading segment due to lower FICC trading revenues. That said, investment banking reported its second-highest number ever in the second quarter. While the sales & trading is likely to follow the same pattern as in the Q2, we expect investment banking revenues to normalize in the third quarter.
- Asset management was the only segment in 2020, which posted negative growth. It was primarily due to lower revenues in the equity investments sub-category. The trend reversed in 2021, with the segment revenues increasing from -$96 million in the year-ago period to $4.61 billion in the first quarter and a 144% jump to $5.1 billion in the second quarter. It was primarily driven by growth in the equity investments sub-segment. We expect the same trend to continue in the third quarter.
- Overall, we expect Goldman Sachs’s revenues to touch $52.8 billion for FY2021.
Trefis estimates Goldman Sachs’s fiscal Q3 2021 revenues to be around $11.87 billion, 2% above the $11.67 billion consensus estimate. We expect the investment banking and asset management businesses to drive the third-quarter results.
The unusual growth in sales & trading and investment banking was driven by higher trading and investment banking deal volumes. Moving forward, the volumes are likely to normalize with recovery in the economy, hurting the GS’ top-line. However, the wealth and asset management segments are likely to continue their growth trajectory. Overall, Goldman Sachs revenues are likely to be around $52.8 billion for FY2021. Our dashboard on Goldman Sachs’ revenues offers more details on the company’s operating segments along with our forecast for the next two years.
2) EPS is likely to miss the consensus estimates
Goldman Sachs Q3 2021 adjusted earnings per share (EPS) is expected to be $9.10 per Trefis analysis, almost 10% below the consensus estimate of $10.11. The bank’s adjusted net income increased 13% y-o-y to $8.9 billion in 2020, mainly due to higher revenues. Further, the same momentum continued in the first and second-quarter – adjusted net income increased from $197 million to $5.3 billion in Q2. It was mainly due to higher revenues and growth in operating income. The operating income benefited from lower operating expenses as a % of revenues and a favorable decrease in provisions for loan losses. We expect the same trend to continue in the third quarter.
Going forward, we expect Goldman Sachs’s net income margin to improve in FY2021, leading to an adjusted net income of $16.2 billion – up 90% y-o-y. Further, the bank has restarted its share repurchase program in the year. This coupled with the recent increase in the common stock dividend to $2 per share (60% growth) from the third quarter will increase the shareholder returns. Overall, it will enable the bank to report an EPS of $47.15.
(3) Stock price estimate 5% higher than the current market price
We arrive at Goldman Sachs’ valuation, using an EPS estimate of around $47.15 and a P/E multiple of just below 9x in fiscal 2021. This translates into a price of $406, which is 5% above the current market price of around $387.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
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