Are Goldman Sachs shares a buy after earnings? Focus on royalty revenue growth

Chris Hondros

Summary in seconds

I rate The Goldman Sachs Group, Inc. (NYSE: GS) stock as a purchase.

In an earlier April 12, 2022 update for GS, I provided an overview of the bank’s first quarter financial results. I rate the last quarter of Goldman Sachs financial performance with the current article. Goldman Sachs’ second-quarter 2022 earnings beat expectations, and strong growth in the bank’s fee income was a key driver of the EPS pace. Going forward, Goldman Sachs’ valuation multiples are expected to increase in line with the increased revenue contribution from recurring fees, which supports a buy rating for GS.

What were the expected earnings of Goldman Sachs?

Goldman Sachs’ expected earnings per share or EPS for the second quarter of 2022 was $6.69, before the bank released its recent quarterly financial results on the morning of July 18, 2022. That would have been equivalent to a decline of -28 % QoQ and a -48% YoY decline in Goldman Sachs net income.

Did Goldman Sachs Beat Its Earnings?

Goldman Sachs beat market expectations with its second quarter 2022 actual results. GS achieved EPS of $7.73 for the second quarter of this year, which was 16% higher than analysts Wall Street had predicted before the release of second-quarter results.

Investors viewed GS’s earnings favorably, as evidenced by the bank’s share price performance after the earnings announcement. Goldman Sachs shares are up +3% from $293.87 on July 15, 2022 to $301.26 on July 18, 2022, and its share price is up another +8% over the next three trading days to close at $326.54 at the end of the trading day on July 21, 2022. In total, Goldman Sachs stock rose +11% following the release of its second quarter 2022 results.

Key measures of GS actions

The key indicators of the GS stock that deserve attention are the bank’s income by business segment and its dividends.

Goldman Sachs’ Q2 2022 earnings outperformance was largely attributable to the fact that strength in its Global Markets and Consumer & Wealth Management business segments helped partially offset weakness associated with its Investment Banking business segment.

According to Goldman Sachs’ Q2 2022 financial results presentation slides, Global Markets segment revenue grew +32% year-on-year to $6,467 million in the latest quarter. Specifically, the FICC (Fixed Income, Currencies, and Commodities) sub-segment saw revenue grow +55% YoY to $3,607 million in Q2 2022. On its Q2 2022 earnings call 2022, GS explained that the FICC sub-segment was a beneficiary. strong customer demand driven by “rising rates, tighter monetary policies and continued commodity volatility”.

Separately, revenue from the Consumer & Wealth Management business increased +25% year-on-year to $2,176 million in the second quarter of 2022. Goldman Sachs noted in its second quarter 2022 earnings presentation that the increased “investment fees”, “higher average AUS (assets under watch) and higher loan and deposit balances” helped drive decent growth for the Consumer & Wealth Management segment in the last quarter. Management and related fees for the asset management segment also increased by +39% year-on-year to $1,008 million in the second quarter of the current year. The above suggests that Goldman Sachs’ efforts to grow its recurring fee-based revenue streams are paying off.

By contrast, the disappointing performance of Goldman Sachs’ Investment Banking business segment was to be expected as capital markets activity tended to slow in a risk-free market environment. Investment banking revenue fell -41% year-on-year to $2,137 million in the second quarter of 2022. Specifically, debt underwriting and equity underwriting revenue fell contracted by -52% YoY and -89% YoY, respectively in the second quarter. But the financial advisory sub-segment was a bright spot for GS in Q2 2022, with financial advisory revenue contribution down slightly by -5% YoY and even up +6% on a quarterly basis. GS pointed out in its recent second quarter earnings briefing that “clients look to us for guidance on how they can execute what is particularly strategic” in turbulent times, which is why the sub -the bank’s financial advisory segment performed well.

Along with better-than-expected performance from some of the Goldman Sachs businesses described above, the bank’s recent dividend hike was also a welcome surprise for investors. June 27, 2022 Looking for new Alphas had mentioned that GS planned to increase its quarterly dividend per share by +25% to $2.50 in the third quarter of 2022 following the “Federal Reserve stress test”.

Income-oriented investors would have been pleased with Goldman Sachs’ performance as a dividend producer in recent years. GS previously increased its quarterly dividend per share by +47% and +60% in Q3 2019 and Q3 2021, respectively. Goldman Sachs currently offers a reasonably attractive forward dividend yield of 3.1% based on expectations of a quarterly dividend of $2.50 per share or an annual dividend per share of $10.

What to expect after winnings

Looking beyond the bank’s results in the second quarter of 2022, I expect GS to continue to grow its recurring fee income, with acquisitions being a key driver.

Goldman Sachs stressed during the bank’s second-quarter earnings briefing that “we remain focused on growing paid revenue streams in our asset management and wealth management segments.” More importantly, GS emphasized that he was “unhappy with where we are on the path to making the business more profitable and more resilient.”

In a previous section of this article, I noted Goldman Sachs’ increase in management and related fees for the asset management segment in the second quarter of 2022. The completion of the acquisition of NN Investment Partners in April 2022 was a key contributing factor, as it increased the AUS (Assets Under Supervision) of the asset management business by approximately $305 billion, as revealed in the results presentation of the second trimester.

Going forward, GS has indicated at previous investor meetings that it intends to rely on acquisitions to grow its wealth management and asset management businesses to increase revenue from recurring commissions.

According to a May 10, 2022 Barclays (BCS) research report (not publicly available), Goldman Sachs Chief Financial Officer Denis Coleman noted at the Barclays Americas Select Franchise conference in early May that the bank “plans to continue to seek acquisitions, particularly in the area of ​​asset and wealth management.” At Sanford C. Bernstein Conference on strategic decisions on June 2, 2022, GS mentioned that “as we continue to grow our asset and wealth management business, we are still looking for acquisitions”.

In a nutshell, investors should expect a positive revaluation from Goldman Sachs after its second quarter results, as the bank’s revenue and earnings will become less volatile going forward with a higher proportion of recurring fee income. .

What is GS Stock’s target price now?

The consensus sell-side price target for GS is now $391.13, which translates to a 20% upside from Goldman Sachs’ last stock price of $326.54 on July 21, 2022. This justifies a buy rating for GS.

In my view, the Goldman Sachs consensus target price of $391.13 is reasonable, as it equates to a consensus P/E multiple of 11.1 times for the next twelve months and a net price/net multiple (P/ NTA). 1.3 times according to S&P Capital IQ The data. For comparison, the bank’s 10-year average P/E and running P/E multiples were 10.1 times and 1.6 times, respectively.

In conclusion, the price target of $391.13 for GS is achievable, when comparing the implied valuation multiples with their respective historical averages.

Is the GS action a buy, sell or hold?

The GS stock is a buy. Goldman Sachs’ focus on growing recurring fee income was the main contributor to the bank’s second-quarter 2022 earnings advance, driving its share price up +11% over the course of the year. of the last four trading days after the announcement of the results. With expectations of a further increase in the contribution of fee income from asset and wealth management in the future, Goldman Sachs shares are expected to continue rising going forward.

Sallie R. Loera