B of A rates Goldman Sachs a 'buy'
Analyst says the bank is well positioned for revenue and market share gains, citing reduced costs and headcount.
Carrier joined B of A Merrill last month, moving from Deutsche Bank, and on Wednesday reinstated his firm's coverage of broker dealers, asset managers and alternative asset managers.
The analyst rates Goldman a "buy," with a price objective of $145, basing his sunny outlook for the company on "the levers that Goldman can control, including reducing costs and headcount, managing and deploying excess capital, and positioning for a pick-up in revenues (equity and M&A) and market share gains," especially in fixed-income trading, or FICC.
Goldman's shares dropped 7% on Wednesday amid the post-election bloodbath for financials, closing at $117.98, and continued to trade down Thursday, returning 32% year-to-date, following a 46% decline during 2011. The shares trade for 0.9 times their reported Sept. 30 tangible book value of $129.69, and for nine times the consensus 2013 earnings estimate of $12.83 a share, among analysts polled by Thomson Reuters.
Carrier said that Goldman's "management has been leading the industry in right-sizing its cost base ($1.9B or 8% of expenses and comp ratio down nearly 800 bps) and capital base (share count down over 10%) for the new environment," which has "aided returns in the tough revenue backdrop, which we expect to continue if it remains sluggish."
Goldman reported third-quarter net earnings applicable to common stockholders of $1.458 billion, or $2.85 a share, improving from $927 million, or $1.78 a share in the second quarter, and a net loss to common shareholders of $428 million, or 84 cents a share, during the third quarter of 2011, when the company recorded a $1 billion loss on its investment in shares of Industrial and Commercial Bank of China (ICBC), another $1 billion in losses on other equity investments, and $907 million in losses from debt securities and loans.
During the most recent quarter, the company's net revenue for its Investing & Lending segment was $1.804 billion, increasing from $203 million in the second quarter, and a negative $2.479 billion a year earlier. FICC income increased by 1% sequentially and 28% year-over-year, to $2.224 billion in the third quarter. Total net revenue during the third quarter was $8.351 billion, increasing from $6 .627 billion in the second quarter, and $3.598 billion, in the third quarter of 2011.
Goldman said that "the ratio of compensation and benefits to net revenues for the first nine months of 2012 was 44.0%, consistent with the first nine months of 2011," and that third-quarter non-compensation expenses of $2.38 billion were up 4% from the second quarter, but down 13% from the third quarter of 2011, with the decline mainly reflecting "lower brokerage, clearing, exchange and distribution fees which principally reflected lower transaction volumes in Equities, lower expenses related to the U.K. bank levy (approximately $100 million related to the enactment of the U.K. bank levy was included in other expenses in the third quarter of 2011) and the impact of expense reduction initiatives."
Goldman Sachs CEO Lloyd Blankfein said in the company's earnings press release that "this quarter's performance was generally solid in the context of a still challenging economic environment."
During Goldman's earnings conference call, incoming CFO Harvey Schwartz said "we continue to be focused on our cost-saving initiatives, and year to date, our non-compensation expenses are running 10% lower than the first three quarters of 2011."
Goldman repurchased 11.8 million shares during the third quarter for $1.25 billion, with year-to-date share buybacks totaling $3.11 billion, as of Sept. 30.
Goldman's annualized third-quarter return on average common equity was 8.6%, and Carrier said that the firm was in a strong position that "could add roughly 6-7% to its [return on tangible equity, or ROTE] over time, taking it to the mid-teens."
Carrier's price objective for Goldman's shares I based on a price-to-tangible book multiple of "1.0 times our forward tangible book estimate, which is in line with our forecasted ROTE of roughly 10%."
"Longer term, we view the firm as innovative and well positioned to benefit from a pick-up in revenues and market share gains (particularly in FICC)," he said.
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