Goldman Sachs (GS: $173, up $4 yesterday)
Goldman Sachs reported 3Q16 EPS of $4.88, well ahead of the consensus at $3.82. The 11% Return on Equity (ROE) was its best quarter of the year. The key story was that profits climbed as trading revenue picked up and costs were curtailed.
Revenue beat expectations due to strength in fixed income and equity trading, which was warmly welcomed as both areas have been weak so far this year. Also, while investment banking revenue was down from a year ago as expected, Goldman held the top spot as the #1 dealmaker for completed M&A transactions, which points to the maintained health of the franchise. Revenue per employee ticked up from last quarter to $322,000, which finally put a stop to several consecutive quarters of declines, which was a key revenue trend that analysts flocked to as a strong sign.
Analysts were also very pleased with expense discipline seen in the results. Non-compensation related expenses were down 2% sequentially. While compensation as a percent of revenue was 39% or modestly above expectations, and the forward outlook for improvement next quarter was comforting.
The company repurchased $1.3 billion of its stock, which was not quite the nearly $2.0 billion some analysts were looking for. That’s okay though in our view. EPS firmly beat expectations without the extra juice of more share repurchases. So we are glad to see management save some dry powder for a rainy day.
In aggregate, we and most others are characterizing the quarter as all around a solid result. Revenues were pretty healthy across the board, particularly in the context that the third quarter is generally seasonally quiet. The news of the investment banking backlog increasing sequentially was a very encouraging sign considering what has been a sluggish year so far.
BMR Take: We continue to see compelling value in the shares trading at 95% of book value. The Street is looking to see ROE break out to the upside as a catalyst to send the stock higher. On that front, this quarter’s favorable ROE result and commentary about the investment banking backlog were noteworthy positives reaffirming we are heading in the direction of our $190 price target. Any indication around the sustainability of some of the areas of recent strength in the months ahead could be an upside lever for the stock, so we will be watching closely!