Goldman Sachs Seeks to Start Growing Again

Next Tuesday, Goldman Sachs (NYSE: GS  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Goldman Sachs has recovered strongly from the worst of the financial crisis more than four years ago, but it hasn't managed to overcome all of the obstacles in its path. With the threat of heightened regulation, the company's earnings haven't grown as quickly as investors would like. Let's take an early look at what's been happening with Goldman Sachs over the past quarter and what we're likely to see in its quarterly report.

Stats on Goldman Sachs

Analyst EPS Estimate

$3.84

Change From Year-Ago EPS

(2%)

Revenue Estimate

$9.60 billion

Change From Year-Ago Revenue

(3.5%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will Goldman Sachs crush estimates again this quarter?
Analysts have gotten a lot more excited about Goldman's prospects over the past few months, as they've raised their estimates for the just-ended quarter by more than 10%, or $0.36 per share. Moreover, analysts have been even more optimistic about Goldman's prospects for the rest of 2013, as their consensus earnings estimate has soared by more than $1 per share. That enthusiasm has translated into gains for Goldman's stock, which has risen more than 11% since early January.

Arguably, Goldman's big news for the quarter came from the stress tests. The company boosted its tier 1 common ratio by a full percentage point over the past year, yet while Goldman passed the tests, that extra capital didn't translate into any stronger of a cushion for its "stressed minimum" capital ratio result. Indeed, both it and Morgan Stanley (NYSE: MS  ) posted the lowest passing scores on that metric, showing the difficulty that investment-oriented banks have in satisfying the Fed about their stability.

Moreover, the Fed wasn't satisfied with Goldman's proposed capital plan, asking the bank to resubmit its plan to take other factors into account. JPMorgan Chase (NYSE: JPM  ) faced a similar restriction, although it plans to move ahead with its decision to boost its dividend by 27% and make a $6 billion stock buyback. Goldman hasn't disclosed its capital intentions at this point, but with a dividend yield of just 1.3%, shareholders certainly hope that a boost to its payout will come in the near future.

One concern that arose in the past month is the extent to which Goldman is baldly moving forward with attempts to get around stricter regulation. In a filing for its proposed business development company, Liberty Harbor Capital, Goldman specifically mentioned its intent to "take advantage of specified reduced reporting and other burdens" that BDCs enjoy. By using the BDC format, Goldman can make profitable investments that it might otherwise not be able to make.

In Goldman's quarterly report, pay special attention to whether the bank has other plans to deal with the changing regulatory environment. The possibility of Goldman's giving up its banking charter has been considered over the past few years as a way to avoid some oversight, but if the company takes that option more seriously, it could have a big impact on its business prospects going forward and finally get earnings moving back in the right direction. 

During the financial crisis, Goldman Sachs did so well pivoting to avoid the worst of the fallout that it had to downplay its success to duck public ire and conspiracy theories. Today, Goldman is still arguably the powerhouse global financial name, yet its stock trades at a valuation of less than half what it fetched prior to the crisis. Does this make Goldman one of the best opportunities in the market today? To answer that question, I invite you to check out The Motley Fool's special report on the bank. In it, Fool banking expert Matt Koppenheffer uncovers the key issues facing Goldman, including three specific areas Goldman investors must watch. To get access to this report, just click here.


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