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Goldman Sachs (GS +2.07%) reported second-quarter earnings that handily topped expectations on the top and bottom lines, and profits were up significantly from a year ago. And, despite pretty strong results, shares are trading for less than the value of Goldman's assets. Here's a rundown of this quarter's results and whether Goldman Sachs is a good buy right now.
Solid numbers, but it's not all great news
Goldman Sachs reported earnings of $3.72 per share, well above the market's expectations of $3.00, and dramatically better than the $1.98 per share earned during the second quarter of last year. In addition, Goldman's revenue of $7.93 billion came in nearly 5% higher than analyst estimates. And, the bank's return on equity of 8.7% for the quarter was a strong improvement from the 6.4% return in the first quarter, and is getting much closer to the 10% industry benchmark.
Digging a little deeper, the results are somewhat mixed, which is likely the reason shares dropped slightly after the results were released.
First, the bad news: Investment banking revenue fell by 11% year over year, but in fairness, the second quarter of 2015 was particularly strong. However, the gloomy piece of information is the fact that the company's investment banking backlog decreased on both a quarterly and annual basis, which doesn't exactly give investors high hopes for the rest of the year.
In addition, investing and lending revenue dropped by 38% year over year thanks to generally lower investment gains in private and public equities, as well as lower revenue from debt securities. In fact, Goldman's revenue was down almost across the board.
|
Revenue Source |
Q2 2016 Revenue (millions) |
Q2 2015 Revenue (millions) |
Change |
|---|---|---|---|
|
Investment banking |
$1,787 |
$2,019 |
(11%) |
|
Institutional client services |
$3,681 |
$3,601 |
2% |
|
Investing and lending |
$1,111 |
$1,801 |
(38%) |
|
Investment management |
$1,353 |
$1,648 |
(18%) |
|
Total revenue |
$7,932 |
$9,069 |
(13%) |
Data source: XXXXX.
Now on to the good news: Trading revenue was up, and although equity trading revenue fell by 12%, the 20% jump in fixed income, currency, and commodities trading revenue more than made up for it. And, the boost in fixed-income trading is even more impressive when you consider the low-interest-rate environment and ongoing global uncertainty, particularly in Europe.
As Chairman and CEO Lloyd Blankfein said, "Despite the uncertainty created by Brexit, we achieved solid results by continuing to serve our clients across our diversified franchise and by managing our business efficiently."
Finally, Goldman's investment management business had a good quarter, even though revenue was down from last year. Not only did Goldman's assets under supervision grow to a record $1.31 trillion, it was due to a combination of market appreciation as well as net inflows of money.
A good job controlling expenses
A quick glance at the numbers reveals that Goldman's revenue actually declined by 13% year over year, yet earnings per share increased by 88%. How can this be?
Simply put, Goldman has done an excellent job of controlling expenses, which dropped by 26% from a year ago. Basic economics tells us that if revenue drops by 13% and expenses simultaneously fall by 26%, the business is going to make more money, and that's exactly what happened here.
Compensation expenses declined by 13%, in line with revenue, although Goldman's total staff declined by 5% during the quarter. However, non-compensation expenses declined by 40%, which is what made the difference. Some of this was due to lower litigation expenses, but expenses were down in every key category but one (communications and technology costs rose by 1%).
Trading at a discount
During the second quarter, Goldman Sachs' book value and tangible book value both increased by 2% to $176.62 and $166.90 per share, respectively. Not coincidentally, the number of outstanding shares decreased by the same percentage, which implies that Goldman has been aggressively repurchasing shares to take advantage of the discount to its intrinsic value.
As of this writing, Goldman trades for approximately $162 per share, meaning that it trades for about a 3% discount to the value of its tangible assets, which is historically rare for Goldman. In other words, Goldman can buy back its own assets for less than they're worth, thereby creating instant value for investors.
The Foolish bottom line
Goldman Sachs, like several other banks that have reported earnings so far, is doing a good job of growing and earning a profit despite persistent low interest rates and global uncertainty. While Goldman Sachs is by no means a low-risk stock, and the investment banking outlook isn't stellar, its current valuation helps to make up for any risks and uncertainty that come with it.
