Tuesday, October 16, 2018

Goldman Sachs' Earnings To Kick Off David Solomon Era

  • Stocks
  • US earnings' season

Goldman Sachs’ (GS:NYSE) Q3 earnings release is expected today, and here’s what you need to know:

The bank, once considered the preeminent trading house on Wall Street missed Q2 analysts estimates, while rival banks posted strong results. The consensus EPS forecast for Q3 is $5.42. The reported EPS for the same quarter last year was $5.02.

The stock is now trading at its 52-week lows, and the question to answer is whether Goldman Sachs’ current trading price of $215 is reflective of the actual value of the large-cap? Or is it currently undervalued, providing us with the opportunity to buy?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment. But price is only the tip of the iceberg. Another key metric that Warren Buffett factors into his own decision making is management.

The management team is currently being reshuffled at Goldman Sachs with David Solomon taking over as Chairman replacing Lloyd Blankfein. And with this new GS leadership profit is expected to grow by 92% over the next couple of years, so the future may seem bright for Goldman Sachs.

But will Solomon execute on this challenging plan to boost Goldman’s annual revenue by $5 billion which, if achieved, will reflect into higher share valuation?

Solomon has already announced the implementation of new strategies as soon as he takes on his new role in the beginning of 2019 including:

  • Replacing the head of fixed income sales as well as the head of client relationship management.
  • Squeezing more out of existing business units especially asset management.
  • Increasing fee-based and recurring revenues.
  • Expanding the technological side.
  • Expanding the consumer banking business

So, it appears that Solomon is looking to rejuvenate the sales and trading business as a whole, and this will most probably be a major part of the earnings call discussion. New regulations in the market have made trading less profitable for Goldman, while advising large corporate clients and wealthy individuals has become a more reliable source of revenue. Replacing his top lieutenants reflects a shift at the firm from the dominant trading operations to investment banking.

Moreover, a constant issue with Goldman Sachs has always been extremely volatile revenues. Unlike Morgan Stanley and JPMorgan who have relatively more stable revenues from banking and wealth management units, Goldman Sachs’s most stable business is asset management. Solomon is therefore prioritizing the expansion of the GS Asset Management unit. GSAM only accounted for 19.6% of total revenues in 2Q18. Solomon wants to increase that, thus stabilizing overall revenues further.

The new leader may also pursue acquisitions to bolster Goldman’s consumer banking operation, or expand into areas like corporate cash management. We will definitely know more after listening to the earnings call.

But only time will tell if these strategies will translate into higher profits and ultimately a higher stock price.

Warren Buffett is loading up on GS Stock

An important factor to consider however, is that Warren Buffett already gave his vote of confidence to David Solomon. His company made its first bet on Goldman Sachs back in 2008 after the collapse of Lehman Brothers, and now 10 years later, following the appointment of the new leader, Berkshire upped its holding in GS stock by 21%!