Yesterday, The Goldman Sachs Group Inc. (GS) announced the redemption of floating coupon notes with a maturity value of $32 million.
These notes, having their maturity date on July 18, 2012, command a redemption price of 68.53% of the remaining amount. Goldman will start the redemption from August 17, 2011.
Earlier in May, Goldman’s closest competitor Morgan Stanley (MS) also redeemed zero maturity coupon notes with a maturity value of $2.5 million. These notes, having their maturity date as of May 12, 2015, commanded a redemption price of 109% of the total amount.
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 per share. 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 reported 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, 12 out of the 16 analysts covering Goldman have lowered their estimates for the third quarter, while none moved north. Furthermore, for fiscal 2011, 14 out of the 20 analysts have decreased their estimates, while 2 analysts have increased their estimates over the last 30 days.
Currently, the Zacks Consensus Estimate for the third quarter is operating earnings of $2.80 per share, a 6.0% 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.However, considering the fundamentals, we are maintaining a long-term Underperform recommendation on the stock.
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