Goldman Sachs (GS 0.47%) beat the market's expectations for the last quarter of 2015, posting better than expected numbers on the top and bottom lines. However, the company's individual business segments reported mixed results, and we're already seeing headwinds early in 2016. While it's certainly possible 2016 will be Goldman Sachs' best year ever, several things would need to work out in Goldman's favor this year -- some of which are beyond the company's control.
Mixed results in 2015
I mentioned that Goldman Sachs beat expectations for both revenue and earnings, but that doesn't tell the whole story. Some parts of the business performed well in 2015, while others struggled. To sum up how Goldman's individual business segments did in 2015:
- Investment banking revenue grew by 9% in 2015. However, within investment banking, advisory revenue climbed by 40% while underwriting revenue fell by 11%.
- Trading revenue was flat year over year, but fixed income, currency, and commodity revenue dropped by 13% while equity trading revenue popped by 16%.
- Goldman's investing and lending revenue fell by 20%.
- Investment management revenue grew by 3%, and total assets under supervision increased by $74 billion to $1.25 trillion.
- Goldman's non-compensation expenses rose by 30% in 2015, mainly due to litigation and regulatory costs. However, compensation and benefits expenses did not increase, despite an 8% increase in staff.
What could make 2016 Goldman Sachs' best year yet?
There are several factors that could take Goldman's profits to the next level in 2016. Just to name a few:
- The stock market could rebound and more. Obviously, a market rally could provide a big boost to Goldman's profits. More companies would feel comfortable taking on debt and issuing IPOs, and the $1.25 trillion Goldman's investment management division has under management would grow, which would in turn result in higher fee/commission income. Plus, Goldman's own investment portfolio would likely rise in value as well.
- The IPO market heats up. 2015 was not a particularly strong year for IPOs. In fact, the $30 billion in IPO proceeds raised last year was the lowest since 2009. And, the average company that issued its IPO in 2015 has produced an average return of negative 2%. Simply put, when the market drops and other IPOs aren't performing well, companies are reluctant to issue their own. A turnaround in the IPO market could provide a serious boost to Goldman's bottom line.
- Fixed income trading turns around. Goldman's fixed income, currency, and commodities trading revenue dropped by 13% in 2015. Some of this was due to the weak commodities markets, but revenue from mortgage and credit products fell as well due to low activity levels. This is a big revenue stream for Goldman -- about 22% of the company's total -- so a boost could mean a lot to Goldman's profits.
- Goldman buys back shares aggressively while the stock is cheap. As I write this, Goldman Sachs trades for just 92% of its book value. In other words, you can buy shares of Goldman stock for 8% less than the value of the assets those shares represent. Goldman still has 63.2 million shares remaining on its authorized repurchase plan, which represents about 15% of the total outstanding. If the company were to use its entire buyback at these depressed levels, it would create an instant $855 million in value for shareholders (at least on paper), and increase earnings per share by 15% without any fundamental change in the business.
Will it happen?
It's certainly within the realm of possibilities that 2016 will be Goldman's best year to date, at least in terms of earnings per share, but I'm not holding my breath. To do so would require a perfect storm of positive catalysts. It would take a 160% jump to beat Goldman's highest revenue of $87.96 billion, or a 103% increase to top Goldman's highest earnings per share yet of $24.73, both of which happened in 2007.
Whether or not 2016 is Goldman Sachs' best year yet isn't the right question to ask. Long-term investors should not preoccupy themselves with a single year's performance, especially in an industry like investment banking that is dependent on so many economic variables outside of Goldman's control. A better question to ask is whether or not Goldman Sachs' stock is a good value at the current price, and whether or not there is long-term growth potential, and the answers to those questions are most definitely "yes."
