Legal Costs & Trading Dog Goldman Sachs
I like to review the notable earnings reports to get a closer look at the overall numbers. Earnings season looks great. Specific data from a few companies helps us understand the direction of corporate earnings. The two earnings reports I’ll discuss here are Goldman Sachs, which reported Tuesday, and Morgan Stanley, which reported Wednesday.
Just like the other banks, Goldman Sachs had high-profit growth. Profits were up 40% to $2.57 billion. EPS was $5.98 which beat estimates for $4.66 and revenues were $9.4 billion which beat estimates for $8.74 billion. Even with these results, the stock fell 0.18% on Tuesday. The stock was up 3.66% in the past year as of Tuesday’s close, so it’s not as if the stock is overbought. Investors simply didn’t like the hair on the quarter. Hair is when there are specifics which ruin a good headline report.
One strand of hair was legal expenses. Non-compensation expenses were up 24% to $2.66 billion which was $200 million more than expected. Another strand of hair was weakness in trading. Fixed income trading revenues were $1.68 billion which beat estimates by $30 million. Equity trading revenues were $1.89 billion which missed estimates by $20 million. Other banks had 20% growth in equities trading revenue, meaning Goldman Sachs lost market share. Volatility wasn’t very high in Q2 compared to Q1, but it was higher than in 2017.
Investing and lending saw a 23% increase in revenues to $1.94 billion which beat estimates by $300 million. Investment banking and investment management reported revenues of $2.05 billion and $1.84 billion, beating estimates by $210 million and $160 million respectively. There are two other notables about the quarter. Firstly, the firm had to maintain its buyback and dividend because preparation for the tax plan forced it to fail the annual stress test. Next year, the bank will likely get a bigger than usual dividend and buyback increase to make up for that temporary alteration. That could cause the stock to underperform this year. Secondly, 12 year CEO Lloyd Blankfein is retiring on October 1st. He will be replaced by the bank’s president, David Solomon.
