Goldman Sachs (GS) still the best-in-class investment bank in what could be a dying industry, reports their 3rd quarter, 2013 financial results before the bell on Thursday morning, October 17th, 2013. Analyst consensus is now looking for $2.43 on $7.36 billion in revenues for expected year-over-year declines of -15% and -6% respectively.
Consensus analyst expectations have been negative through the quarter as original Q3 13 estimates following the July report were for $2.88 in core EPS and $7.9 billion. Using JP Morgan's (JPM) trading results reported last Friday, October 11th for Q3 '13, here is what JPM's trading results looked like:
- JPM's core investment bank results were better than expected;
- Core fixed income and equity trading fell 2% y/y versus the 4% - 5% expected;
- Core FICC (Fixed Income, Currency and Commodities) trading fell 8%
- Core equity trading alone rose 20% y/y;
- Investment banking fees alone rose 6% y/y, with debt underwriting +6% y/y, and equity underwriting +42%;
Since GS doesn't have the consumer bank, and mortgage related businesses that the large money-center banks have, GS shouldn't have the drag from the consumer businesses in Q3, assuming that GS can maintain share in the key investment bank businesses.
As someone who has followed and modeled the broker's for years, I can tell you that Wall Street has never covered itself well. Brokerage earnings estimates have the highest standard deviations relative to consensus estimates than just about any other sector, with the possible exception of semiconductors.
Despite the tougher Treasury market in Q3 13, and given the decent returns on the equity indices, the stable credit markets and the renewed optimism in the IPO markets, I'm expecting GS to beat on the top and bottom line on Thursday morning.
From a longer-term perspective, I thought Dodd-Frank and the death of proprietary trading for GS could cost the bank $10 per share in good markets, which is a rough guesstimate based on peak earnings of $25 in EPS in 2007.
If GS would trade up to $190b - $200, i think the stock would be fully valued.
Currently trading at 10(x) expected 2013 and 2014 EPS of $15 and $15.39, the expectation of 9% growth this year and just 2% in 2014 is probably way too conservative. However, a firm like GS has a VERY volatile EPS history given their trading reliance and the sensitivity of GS to the vagaries of the capital markets.
Tangible book value (TBV) is roughly $140 per share while book value is pegged at $150 per share so the stock remains pretty cheaply valued on most measures.
The key question in this post Dodd-Frank and anti Wall Street world is "what is core EPS and EPS growth" for the investment banking giant and what is the added value of the brand ?
If GS traded to $190 - $200, we'd look hard at reducing the weighting.