On Tuesday, The Goldman Sachs Group Inc. (GS) announced the sale of its 15-year bonds with a coupon rate of 5.9% and maturity value of $20 million. These notes have their maturity date on September 13, 2026 and Goldman will start the settlement from September 13, 2011.
Last month, Goldman announced the sale of its 15-year senior unsecured notes with a maturity value of $10 million on September 1, 2026. The coupon rate for these notes was 6.05%.
Moreover, Goldman also announced the redemption of floating coupon notes with a maturity value of $32 million. These notes, having their maturity date as of July 18, 2012, command a redemption price of 68.53% of the remaining amount.
In August, Goldman’s closest competitor Morgan Stanley (MS) announced the sale of floating rate notes (FRN), valued at 1 billion yen, and maturing in August 2016.
Earnings Recap
In July, Goldman reported second-quarter 2011 earnings per share of $1.85, substantially lower than the Zacks Consensus Estimate of $2.29. Coupled with the global macro-economic concerns, the deterioration was driven by a decrease in revenue and poor performance in Institutional Client Services division. However, lower operating expenses partially offset the decline.
Total revenue of Goldman plummeted 39% from the prior quarter and 18% year over year to $7.3 billion. Revenue also missed the Zacks Consensus Estimate of $9.1 billion, primarily due to a decline in client activity level.
Estimate Revision Trends
Over the last 30 days, 2 out of the 15 analysts covering Goldman have lowered their estimates for the third quarter, while none moved north. Furthermore, for fiscal 2011, 1 out of the 18 analysts has decreased the estimate and 1 analyst has increased it over the last 30 days.
Currently, the Zacks Consensus Estimate for the third quarter is operating earnings of $2.62 per share, a 12.2% drop from the year-ago quarter. Moreover, over the last 7 days, earnings estimates for the third quarter and fiscal 2011 have remained stable.
Our Take
The redemption of notes will provide the company some financial flexibility at this point. We anticipate that these restructuring initiatives to reduce balance sheet risk will improve its valuation over time. Nevertheless, Goldman is facing major challenges with respect to competition and is gradually regaining its industry-leading position.
We expect Goldman to benefit from its well managed global franchise, strong capital base and industry leading position in trading and asset management. We expect Goldman’s prudent business model and strong fundamentals to deliver better earnings.
However, slight decrease in client activity and overall revenue decline remain a matter of concern. Moreover, regulatory issues, including lawsuits, are expected to dent the financials of the company in the upcoming quarters.
Goldman currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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