Investment banking giant Goldman Sachs (NYSE:GS) reported its third-quarter earnings on Tuesday morning, and the results looked pretty strong. Not only did the bank beat expectations on both the top and bottom lines, but most areas of the business did significantly better that estimates called for. Investors seem to agree, as the stock jumped by about 1.5% shortly after the announcement.
Here's a look at the headline numbers, some of the most important takeaways from Goldman's earnings report, and why the good news definitely outweighs the little bit of disappointing news this quarter.
The headline numbers
The investment bank handily beat estimates for both metrics and posted strong year-over-year growth. Earnings of $6.28 per share came in well ahead of expectations, which called for $5.28 per share, and represented a 25% boost compared to a year ago. Revenue of $8.65 billion was about $250 million more than analysts had been looking for and reflected better-than-expected results throughout most of Goldman's business.
Digging a little deeper: Mostly good news all around
While the top- and bottom-line performances certainly look good, earnings and revenue alone never tell the entire story of how a company is doing. So, to get a better idea of why the market is having a positive reaction to Goldman's report, here are some of the key takeaways investors should know:
- Investment banking revenue grew 10% year over year to $1.98 billion. M&A, underwriting, and IPO activity were all stronger than expected.
- Goldman has the No. 1 market share in year-to-date M&A, equity offerings, common stock offerings, and IPOs.
- Return on equity of 13.7% is well in excess of the 10% industry standard and is Goldman's highest through the first three quarters in nine years.
- The bank's book value is up by 9% so far in 2018 to $197.33 per share. As of this writing, Goldman trades for just 110% of book value, one of the cheapest valuations among big banks.
- The company's effective tax rate of 19% is among the lowest in the banking sector.
- Perhaps the most important number from long-term investors' perspective is the 56% year-over-year growth in net interest income in the firm's investing and lending division. I've written many times before that Goldman's fast-growing Marcus consumer banking platform is just starting to scratch the surface of its potential, and I wouldn't be surprised to see it continue to grow rapidly for several more years to come.
What about trading?
Generally speaking, even when banks have excellent overall earnings reports, it's not 100% good news. That's certainly the case here.
The major weak point in Goldman's third-quarter report was its trading revenue. Trading is Goldman's largest segment, and revenue came in about $60 million below estimates. Fixed-income trading, which has been an ongoing concern for the bank, was the main culprit, with revenue dropping about 10% from last year.
Having said that, I firmly believe that the rest of Goldman's third-quarter results more than outweigh a bit of weakness in trading. Goldman's rapidly growing consumer banking division is especially exciting and represents an amazing long-term opportunity for the bank, and the investment banking franchise remains as strong as ever. Goldman Sachs may be one of the cheapest bank stocks in terms of price-to-book valuation, but it certainly isn't performing like one.