Shares of Goldman Sachs (GS) dipped recently following the company’s quarterly earnings report (see conference call transcript here). Goldman Sachs earned $1.56 per share on revenue of $11.9 billion dollars. Net income was down to $908 million dollars. That is a 72% decrease compared to the $3.3 billion dollars that Goldman earned in Q1 last year. There is a growing concern that this is the new normal for Goldman Sachs since the company’s results were a far cry from their first quarter earnings of 2010. So, is Goldman Sachs losing its golden touch?
Here are the highlights from the past quarter.
Earnings would have come in at $4.38 per share if not for a preferred dividend payment. The Investment Management and Investing and Lending divisions were the earnings drivers with both divisions seeing double digit revenue growth for the quarter. Goldman still managed to have a remarkable 34% operating margin before taxes. The drag on earnings came from Fixed income and Trading which were down 28%. New regulations have forced Goldman to decrease its leverage and ratchet down its proprietary trading business. The Client Services division saw revenue slump 37%.
Goldman’s results from last quarter would have been impressive for a Morgan Stanley (MS) but the results were just average for Goldman. Goldman is one of the few companies that can beat the Street and still underperform. The company has built a reputation on being able to outperform competitors even during the bleakest of times. Analysts have an unrealistic expectation of blowout quarter after blowout quarter for Goldman.
The company is making the right moves to create value for shareholders. Goldman made the smart decision to repay a $5.5 billion dollar loan from Warren Buffett. The move will hurt the company’s earnings in Q2 but will save the company money over time. Buffett was making $15 a second from his investment in Goldman Sachs. Goldman bought back $1.4 billion dollars of stock during the quarter as well.
Goldman may see returns dip somewhat but the company is still in great shape. Goldman is a sounder company that is better capitalized since the financial crisis with higher Tier 1 capital ratios. The company’s leverage ratio is down to 12.9 which is more than half of where it was before the financial crisis. The company is sitting on $64 billion dollars in shareholder equity and is waiting for the right opportunity to put some of this capital to work. Return on equity may have dropped from the 20% average but it is still above average at 12%.
Goldman’s stock is getting cheaper with shares trading at 1.1 times book value of $129 a share. The stock trades at 10 times this year’s earning’s estimates and 8 times next year’s. Goldman’s shares are getting cheaper if these numbers can be trusted. If history is any indicator, I would not be willing to bet against Goldman Sachs.