Goldman Sachs (NYSE:GS) reported its fourth-quarter earnings on Friday, and at first glance the numbers look pretty good. After Bank of America, Citigroup, and JPMorgan Chase disappointed investors, Goldman's results were a nice change of pace.
However, shares fell following the announcement, as you can see in the chart above. Is something in Goldman's numbers scaring investors, or is this an opportunity to get into a great company at a discount?
The numbers look solid
First, let's look at the "headline" numbers. Goldman produced fourth-quarter earnings of $4.38 per share on $7.69 billion in revenue, surpassing the market's expectation of $4.32 per share and $7.64 billion in revenue. So the company beat expectations on both the top and bottom lines.
Looking a little deeper
Despite this good news, some issues could explain the drop in share price. For example, fourth-quarter investment banking revenue dropped by 16% from the same quarter of the previous year. Merger and acquisition advisory revenue was strong, but it was outweighed by a sharp industrywide slowdown in debt and equity underwriting. In fact, underwriting revenue dropped by 34% year over year.
Institutional-client revenue was also disappointing. Fixed-income, currency, and commodities trading revenue fell by 29% year over year. Revenue from equities was up, but not enough to prevent an overall revenue decline in the division. Fourth-quarter revenue from the investing and lending and investment management divisions was down year over year as well.
There was some encouraging data in the report. Goldman did a good job of managing expenses, and capital levels increased. Further, the company's excellent stock repurchase program returned nearly $5.5 billion to shareholders during 2014.
Compensation expense was unchanged for the year, even though Goldman had 3% more employees than it did in 2013, and noncompensation expenses dropped by 4% despite a slight increase in net revenue for the year.
As far as capital levels are concerned, Goldman's Common Equity Tier 1 ratio increased from 11.8% to 12.2% from the end of 2013.
Finally, Goldman repurchased 31.8 million shares during 2014, which represents more than 7% of the shares currently outstanding. Another 25.4 million shares remain authorized under the current repurchase program, so this impressive buyback rate should continue.
Buy, sell, or hold?
Even though the latest round of bank earnings in general have not been fantastic (Goldman's included), this stock looks like a good value right now.
Goldman reported that its book value and tangible book value increased to $163.01 and $153.79, respectively, which means that if the post-earnings drop holds, shares are trading for just over 1.1 times tangible book. Shares are also trading for just over 10 times 2015's expected earnings.
To sum it up, Goldman looks like a pretty good value at the current share price, especially after the post-earnings drop. The company has the management and resources to deliver solid results despite any weakness in the financial sector, and Warren Buffett has referred to an investment in Goldman as a "bet on brains."