Goldman Beats Estimates – But Are They a Buy?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The news – though wrapped in a lot of ribbons and bows – was mixed as Goldman Sachs (NYSE: GS) shared Q1 earnings today. It appears investors – for the most part anyway – understood that as the share price languishes at or near where it was at the open.
While earnings beat expectations - which is rarely a bad thing - there were also some less than desirable insights sprinkled throughout the announcement. So with all of this what’s a good investor to do? Look hard before you leap - and explore one or two alternatives that may prove to be better, more diversified opportunities.
The Good News
Analyst consensus guess-timates for Goldman’s Q1 were $3.55 a share in earnings – which would have been solid enough, if not outstanding. The $58 billion behemoth pleasantly surprised generating $2.1 billion in profit, or $3.92 a share. As a result, shareholders will enjoy a little higher dividend as the bank returns some of the profits in the form of what will be a 1.57% dividend, up from the current 1.19%.
The gains came from the advisory and trading desks as investors began to slowly make their way back to both the bond and equity markets. Bond trading was a particularly strong area, at least compared to the same period last year. But perhaps the biggest reason for the surprisingly strong quarter were the myriad of cost-cutting moves Goldman’s instituted over the past year. Another reduction in the workforce – about 3%, or 900 people were let go in Q1 – has helped trim overhead and streamline operations. Well, that certainly sounds good, right?
The Not So Good News
Though not unexpected, earnings and revenues were down compared to last year. In Q1 of 2011 Goldman earned an impressive $4.38 a share, primarily because of strong banking and trading conditions. But more concerning for investors – and the reason the stock remains relatively flat after what at first glance appeared to be great news – is that virtually all the earnings came from the trading and financial advisory divisions. All other divisions were either flat or down – quite naturally leaving investors uneasy.
Not surprisingly CEO Lloyd Blankfein has suggested the poor performance in most areas leaves room for considerable growth going forward, and there’s some logic to that. But so far at least investors don’t seem to be on board with Mr. Blankfein’s optimistic outlook.
So now what? It really boils down to this for those considering adding Goldman Sachs to their portfolio – it’s a bet on continued improvement in the global markets, an increase in investment banking activity and continued success in Goldman’s cost-cutting initiatives.
If you’re on board with all that, Goldman is a sound investment, and a 1.59% dividend isn’t bad. If you find that tough to reconcile, you may be better served looking toward a traditional banking investment option that also derives revenue from market and trading activity. The recent, positive earnings announcement from JPMorgan Chase (NYSE: JPM) or even Citigroup (NYSE: C) may prove to be better options. Both are better diversified product and service-wise, offering their customer’s traditional banking services in addition to partaking in underwriting, investment banking and trading activities. JPMorgan’s 2.77% dividend is pretty darn nice too, as is Citi’s slow, but steady growth in their lending departments.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.