Goldman Backs Our Bank Stock Shakeup With Strong Earnings and Upbeat M&A Outlook
Shares of Goldman Sachs hit near all-time highs on Wednesday after the investment bank reported strong fourth-quarter results and signaled more deals were in the works. Revenue for the quarter ended Dec. 31 rose more than 22% year over year to $13.9 billion, far exceeding expectations of $12.4 billion, according to estimates compiled by LSEG . Earnings per share (EPS) more than doubled from last year, coming in at $11.95 and exceeding the expected $8.22, according to LSEG. Ultimately, Goldman Sachs delivered a fantastic set of results to close out the year. We reiterate our Buy equivalent rating of 1 and our price target of $650. Fourth-quarter revenue beat expectations by about $1.5 billion, driven by strong net interest income and noninterest income. All three key operating segments also reported higher-than-expected revenue. Meanwhile, earnings per share more than doubled year over year. Goldman Sachs “once again ended the year as the No. 1 M&A advisor in the markets,” CEO David Solomon said on the call – a stark illustration of why we started a position in Goldman shares last month and dumped rival Morgan Stanley. . We expect an increase in M&A activity, as well as IPOs, in 2025. Goldman is a better and more focused way to ride this expected wave of M&A. “There has been a significant shift in CEO confidence, particularly following the US election results,” Solomon said, in another encouraging remark for our thesis. “In addition, there is significant sponsor lag and an overall increased appetite for dealmaking, supported by an improving regulatory environment. The combination of these conditions is expected to drive more activity in 2025.” CFO Denis Coleman added: “While some policy uncertainty remains, regulatory burden is expected to be reduced, which should support risky assets and capital deployment. We are optimistic about the outlook for 2025 and expect continued M&A and IPO activity to pick up.” Indeed, Goldman’s investment backlog increased sequentially in the fourth quarter, Coleman said. Goldman Sachs (GS ) Why We Own It: Goldman Sachs is our bet on a rebound in the dealmaking and regulatory environment once President-elect Donald Trump returns to the White House next week. 2024 Most recent purchase: January 7, 2025 Competitors: Morgan Stanley, JPMorgan, Bank of America and Citigroup The numbers released by Goldman were particularly high quality, judging by its performance on several indicators that all investors use to rate banking results These metrics include efficiency ratio and return on tangible equity, or ROTCE. We also liked Goldman’s cash returns to shareholders between October and December. The company repurchased $2 billion worth of shares during the quarter, or 3.5 million shares in total, at an average purchase price of $566.27, a solid level given that the shares are now above 600 dollars on Wednesday. It also paid out an additional $965 million in dividends. Goldman’s total capital returned to shareholders in 2024 was a record $11.8 billion, 68% of which came from buybacks. Of course, it’s still early in the year, but we’re excited to jump into Goldman, based on these results and management’s optimism on the call. Another added benefit is that the company’s contested “platform solutions” segment is increasingly a drag on profitability. Quarterly Commentary As we can see in the chart above, the world’s leading investment bank had an almost flawless quarter in its most important positions. Although non-compensation expenses were a little higher than expected, they were still lower than last year and more than offset by efficiency gains elsewhere. We can see this in its very good efficiency ratio, well below expectations at 59.6% against the consensus of 66.9%, according to FactSet. Lower is better on this metric. “Operational efficiency remains one of our key strategic objectives,” Solomon said on the call. “And while we have made progress, we believe there are significant opportunities to drive greater efficiencies across our business.” We have established a three-year program as part of our business planning process that will help us dynamically manage our spend base, leverage technology. and automation, and reinvest in our business. Return on tangible equity, another crucial metric when it comes to valuing financial institutions, was also well above expectations at 15.5% in the fourth quarter. Investors view ROTCE as a way to assess the appropriate multiple of tangible book value, which is the measure of a company’s assets minus its liabilities and intangible assets such as goodwill. On a per-share basis, Goldman’s tangible book value of $316.02 beat the consensus estimate of $315.45. When both metrics beat Wall Street’s expectations, as they did this quarter, it’s a pretty positive sign that investors might be willing to pay a higher premium for the stock in the future. This dynamic is often called a higher revaluation. Goldman’s Common Equity Tier 1 capital ratio, which indicates a financial institution’s ability to withstand stress in the financial system, was well above the minimum of 13.7%. Such a CET1 ratio means that Goldman is not only well-positioned to withstand financial stress, but is also able to continue returning cash to investors through buybacks and dividend payments. Revenue in Goldman’s Global Banking and Markets segment, by far the largest of the three, rose 33% year over year. This was driven by a 32% increase in equity revenue, a 24% growth in investment banking fees (increase in equity and debt underwriting activity) and a 35% increase in revenue Fixed Income, Currencies and Commodities (FICC). Asset and wealth management revenue, up 8% year-on-year, was driven by records management and other fees. About half of the segment’s revenue comes from asset management and wealth management fees. The rest is tied to things like equity investments, incentive fees and private banking. Client assets within wealth management – including assets under supervision, brokerage assets and deposits at Marcus online bank – totaled approximately $1.6 trillion. Total assets under management ended the year at a record level of $3.14 trillion, up $325 billion from the end of 2023. Growth was seen across all asset classes and all customer channels. “In asset wealth management, we have consistently increased our more sustainable management fees and other private banking fees and our lending revenue, both of which hit a record in 2024,” Solomon said at the call. “Notably, management and other fees exceeded $10 billion, surpassing our 2024 target.” The fourth quarter represents the “28th consecutive quarter of long-term fee-based net inflows,” Solomon added. Revenue from platform solutions – home to Goldman’s partnership with Apple for the latter’s branded credit card offering – rose 16% year over year, driven entirely by an 18% increase in consumer platforms . However, the growth primarily reflects “reductions related to the GreenSky loan portfolio held for sale” during the year-ago period, according to a company statement. Goldman officially sold GreenSky, its troubled foray into consumer home improvement lending, in March 2024. Despite platform solutions’ annual revenue growth, the segment posted a loss in the quarter and for the whole year. So that weighs on the company’s overall return on equity – to the tune of about 75 to 100 basis points, or three-quarters to a full percentage point. There are, however, reasons to be optimistic. On the call, Solomon said he expects the segment to break even on a pre-tax basis in 2025, with Apple Card “driving toward profitability” a key factor in how quickly platform solutions will move from a drag on equity returns to neutral. , to a positive contribution. In the longer term, Solomon is preparing for the end of the partnership, contracted until 2030. “Whether it is (terminated) in the medium term or for the entire duration of the contract, it will not be a long-term affair for the “business,” he said. “And that will ultimately allow us to exit and return capital.” CNBC reported in September that JPMorgan was beginning discussions to take over Goldman’s Apple Card. (Jim Cramer’s Charitable Trust is long GS. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY OBLIGATION EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
The Goldman Sachs logo is seen on the trading floor of the New York Stock Exchange in New York on November 17, 2021.
Andrew Kelly | Reuters
Goldman Sachs Shares jumped to near all-time highs on Wednesday after the investment bank reported strong fourth-quarter results and signaled more deals were in the works.