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Stock Analyst Update

Goldman Sachs' Business Model May Rebound Before Peers


Like other financial-services companies that have reported earnings, narrow-moat Goldman Sachs (GS) was still able to generate positive net income despite significant increases in loan-loss provisions and markdowns on securities. The company reported net earnings to common shareholders of $1.1 billion, or $3.11 per diluted share, on $8.7 billion of net revenue. Net revenue decreased 1% from the previous year and 12% sequentially. The sequential decline in net revenue is from the company booking a net loss of $782 million in principal transactions, as investments on its balance sheet were marked down. We don’t anticipate making a material change to our $218 fair value estimate for Goldman Sachs and assess shares as modestly undervalued.

Goldman Sachs’ earnings may rebound faster than peers’ because of its lower interest-rate exposure. While the company is building out its traditional banking and investment-management businesses, which we believe will serve shareholders well in the long run, most of its revenue is still transaction-related. Typically, over 60% of its revenue comes from its investment banking and global markets trading business segments. Investment banking is mainly driven by economic confidence and occasionally fear in times like this, as companies raise capital to prepare for a downturn. Trading is inherently volatile quarter to quarter but shouldn’t remain perpetually low in a subdued economic environment. With many large banking peers’ earnings dependent on interest rates, which may remain low for well over a year, and credit losses that will stay high for likely multiple quarters due to the spike in unemployment, Goldman Sachs’ earnings could rebound as soon as GDP turns positive.

Goldman Sachs also has the capital strength and liquidity to survive even a significant economic downturn. The company ended the quarter with $76 billion of tangible common equity and averaged $243 billion of global core liquid assets in the first quarter.

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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.