Bank Analysts Slash Goldman Estimates Hardest

Tuesday, 13 Sep 2011 09:35 AM

 

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Analysts have been slashing earnings estimates for big Wall Street banks recently, particularly for Goldman Sachs, as unpredictable trading markets and weak merger and underwriting volumes hurt the sector's profit potential.

Third quarter average profit estimates for Goldman Sachs have fallen 18 percent over the last month to $2.28 per share, according to Thomson Reuters I/B/E/S.

The average estimate for Bank of America has fallen 9 percent, and the average forecast for Morgan Stanley has fallen 4 percent. Estimates for JPMorgan Chase and Citigroup have barely budged.

Goldman has fallen particularly hard because it has a greater dependence on traditional investment banking businesses like buying and selling securities, underwriting stock and bond offerings, and advising on mergers.

The largest U.S. investment bank has derived 36 percent of its revenue from the once-lucrative business of fixed income, currency and commodities trading since the start of 2006.

In contrast, Goldman's chief rival Morgan Stanley derived 20 percent of revenue from its comparable trading operation, and JPMorgan's bond-trading business contributed 13 percent of revenue over that time.

Trading was particularly difficult in the third quarter because even though clients traded more in a volatile market, much of the activity came from low-margin products, like Treasury bonds and equities. Analysts also warn that some banks may have to take steep write-downs on inventories of stocks and bonds whose values declined.

On Sunday, Citigroup analyst Keith Horowitz cut his third-quarter earnings estimate for Goldman to just 10 cents, down from a previous estimate of $2.70, although 36 cents of that came from one-time items. Horowitz cut his Goldman outlook as part of his broader reduction in price targets for major banks.

Horowitz's move follows Oppenheimer & Co analyst Chris Kotowski changing his recommendation on Goldman shares to "perform" from "outperform" on Tuesday. Both he and Nomura analyst Glenn Schorr also cut Goldman estimates dramatically.

Full-year average estimates for Goldman Sachs have dropped 8 percent and 3 percent for 2011 and 2012, respectively, according to Thomson Reuters I/B/E/S.

Banking analysts have been slow to adjust their forecasts even as the economy has slowed.

Analysts have cut near-term estimates several times this year after disappointing earnings results, but estimates beyond 2011 still paint a relatively sunny picture of earnings growth.

Price targets have been lowered to reflect stocks that the market has spurned, with most large banks, including Goldman, already trading below tangible book value.

"Brokers like Goldman, I just want to stay away from them right now because I feel like they are so tied to the market," said Todd Sullivan, a value-stock investor at Rand Strategic Partners in Westborough, Massachusetts, who manages about $10 million in assets and owns Bank of America but not Goldman.

Less Room to Run

Even outside of trading, Goldman could turn in a disappointing quarter.

Goldman's investing and lending business may also get hit hard because of declines in the value of the stocks and bonds that Goldman owns. Its holdings in Industrial And Commercial Bank of China have declined more than 15 percent so far this quarter, which could result in a $475 million write-down, according to Citi's Horowitz.

Nomura's Schorr anticipates a $700 million drag on revenue from the overall investing and lending division.

Analysts also lowered assumptions for its investment banking revenue because companies have been hesitant to pull the trigger on IPOs, debt offerings and M&A transactions due to high volatility and weak pricing.

Most analysts have remained generally bullish on Goldman despite what may soon be the sixth straight quarter of weaker profit and revenue. Of the 28 analysts who cover the stock, 18 recommend buying more, while 6 suggest clients hold onto positions without adding and only two recommend selling.

But even fans of the stock have gotten more cautious about how much it might rise. The median price target for Goldman is $155, down from $170 a month ago and $198 three months ago.

New targets still represent a big premium to Goldman's recent market value. Its stock is down 39 percent this year, setting a new 52-week intraday low of $99.80 on Monday. It has traded at a discount to tangible book value since August, reflecting investors' belief that, without more trading activity, the cost of capital for Goldman's huge trading business may cut deeply into earnings.

That said, shares of Morgan Stanley, Bank of America and Citigroup have posted sharper declines than Goldman Sachs so far this year. That is why some stock analysts are less enthusiastic about Goldman Sachs. They believe stocks that have fallen further may have more potential upside.

"If a client called us up to ask if he/she should buy the stock we would suggest at least seven other names that we would suggest buying first," said Oppenheimer's Kotowski.

© 2014 Thomson/Reuters. All rights reserved.

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