The Goldman Sachs Group, Inc. (GS) is scheduled to report its fourth-quarter 2014 results before the opening bell on Friday, Jan 16. Too many questions linger in investors' minds this time around, given the tough industry backdrop and litigation hassles that the bank endured during the quarter.
In the last quarter, this banking giant delivered a 41.93% positive earnings surprise, beating the Zacks Consensus Estimate. Higher investment banking and fixed income revenues along with strong capital deployment activities were the positives for the quarter. However, increased expenses were a concern. Moreover, lower trading revenues reflected market volatility. Notably, Goldman recorded a 25.95% average positive earnings surprise over the trailing four quarters.
Will Goldman be able to keep the earnings streak alive after combating the challenges that the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.
Factors to Influence Q4 Results
The tide of operating environment has not been favorable since the beginning of the year, but the U.S. banks proved their mettle and stayed afloat. The quarter was no better in terms of volatility in the financial markets and rising structural pressure. Further, there were downsides like soft trading volumes, lackluster client activities and high legal costs, which were witnessed in the first three quarters as well.
Feeble mortgage activities owing to uncertainty over interest rates should also be reflected in the results. Growth in advisory and underwriting revenues, which were one of the major driving forces in the first three quarters on the back of an M&A boom, is likely to lose strength in the fourth quarter. It’s not that M&A activity was sluggish during the quarter, but underwriting of U.S. banks remained somewhat dormant.
Aggressive cost control through streamlined operations should contribute to the bottom line. Further, a favorable asset market backdrop as well as encouraging macroeconomic factors – falling unemployment, progressive housing sector and a flexible monetary policy – is likely to have lent some support to the financials of the banks.
Goldman, which jumped on the bandwagon of Wall Street banks to target the fastest growing market of actively managed exchange-traded funds (ETFs) last quarter, has filed for a number of new alternative exchange-traded funds. In December, Goldman in a filing with the U.S. Securities and Exchange Commission (SEC) sought permission for 11 ETFs. Given the underlying strength in the ETF market, it is a prudent decision for Goldman to expand in this area.
However, given the competitive environment and stringent regulatory landscape, global banks are facing tough challenges in controlling costs and increasing revenue. To make matters worse, a number of major banks have been encountering legal overhangs in recent times. Notably, as banks’ commodity business drew increasing public criticism and regulatory scrutiny on banks' ownership of the physical commodity business, Goldman completed the sale of its metals warehouse unit – Metro International Trade Services LLC in December.
Though Metro had been contributing to Goldman’s revenues, the company does not consider it a strategic fit anymore. While banks are striving for alternative sources of revenue in a still low interest rate environment, these are forced to reduce exposure to a lucrative segment like the commodity business.
Most importantly, this banking giant failed to impress analysts with its level of activities during the quarter. The weakness surrounding the industry and the company's financials, which are highly susceptible to such negatives forced many analysts to significantly lower their earnings estimates. The Zacks Consensus Estimate has moved down around 1.9% to $4.63 per share over the last seven days.
Earnings Whispers
Our proven model does not conclusively show that Goldman is likely to beat the Zacks Consensus Estimate in the fourth quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: The Earnings ESP for Goldman is -7.19%. This is because the Most Accurate estimate of $4.26 is below the Zacks Consensus Estimate of $4.59.
Zacks Rank: Though Goldman’s Zacks Rank #3 increases the predictive power of ESP, we also need to have a positive ESP to be confident of an earnings surprise call.
Stocks That Warrant a Look
Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
First Republic Bank (FRC) has an earnings ESP of +1.39% and carries a Zacks Rank #3. It is expected to report its fourth-quarter results on Jan 15.
The earnings ESP for The PNC Financial Services Group, Inc. (PNC) is +0.57% and it carries a Zacks Rank #3. The company is scheduled to release its fourth-quarter results on Jan 16.
First Horizon National Corporation (FHN) has an Earnings ESP of +5.88% and carries a Zacks Rank #3. It is scheduled to report results on Jan 23.
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