Chris Hondros
Elevator Pitch
I rate The Goldman Sachs Group, Inc.’s (NYSE:GS) stock as a Buy.
In an earlier April 12, 2022 update for GS, I did a preview of the bank’s prior first-quarter financial results. I assess Goldman Sachs’ most recent quarterly financial performance with the current article. Goldman Sachs’ Q2 2022 earnings came in above expectations, and the bank’s strong fee revenue growth was a key driver of the EPS beat. Looking forward, Goldman Sachs’ valuation multiples should expand in tandem with the increase in revenue contribution from recurring fees, and this supports a Buy rating for GS.
What Were Goldman Sachs’ Expected Earnings?
Goldman Sachs’ expected earnings per share or EPS for the second quarter of 2022 was $6.69, before the bank reported its recent quarterly financial results on the morning of July 18, 2022. This would have been equivalent to a -28% QoQ decline and a -48% YoY drop in Goldman Sachs’ bottom line.
Did Goldman Sachs Beat Earnings?
Goldman Sachs beat market expectations with its actual Q2 2022 earnings. GS achieved an EPS of $7.73 for the second quarter of this year, and this turned out to be +16% better than what the Wall Street analysts had projected prior to the Q2 earnings release.
Investors viewed the earnings beat for GS favorably as evidenced by the bank’s post-earnings announcement stock price performance. Goldman Sachs’ shares rose by +3% from $293.87 as of July 15, 2022 to $301.26 as of July 18, 2022, and its stock price increased by a further +8% in the next three trading days to close at $326.54 at the end of the July 21, 2022 trading day. In aggregate, Goldman Sachs’ stock increased by +11% following its Q2 2022 results disclosure.
GS Stock Key Metrics
The key metrics for GS stock that deserve attention are the bank’s revenue by business segment and its dividends.
Goldman Sachs’ Q2 2022 earnings beat is largely attributable to the fact that the strength in its Global Markets and Consumer & Wealth Management business segments helped to partially offset the weakness associated with its Investment Banking business segment.
As per Goldman Sachs’ Q2 2022 financial results presentation slides, the Global Markets’ segment revenue expanded by +32% YoY to $6,467 million in the recent quarter. Specifically, the FICC (Fixed Income, Currencies, and Commodities) sub-segment saw its revenue increase by +55% YoY to $3,607 million in Q2 2022. At its Q2 2022 results call, GS explained that the FICC sub-segment was a beneficiary of strong client demand driven by “rising rates, tightening monetary policies and continued volatility across commodities.”
Separately, revenue derived from the Consumer & Wealth Management business grew by +25% YoY to $2,176 million in the second quarter of 2022. Goldman Sachs noted in its Q2 2022 results presentation that the increase in “placement fees”, “higher average AUS (Assets Under Supervision) and higher loan and deposit balances” helped to drive decent growth for the Consumer & Wealth Management segment in the recent quarter. Management and related fees for the Asset Management segment also increased by +39% YoY 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 delivering results.
On the other hand, the disappointing performance of Goldman Sachs’ Investment Banking business segment was to be expected, as capital markets activity tends to experience a slowdown in a risk-off market environment. Revenue generated from Investment Banking fell by -41% YoY to $2,137 million in Q2 2022. Specifically, debt underwriting and equity underwriting revenue 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, as revenue contribution from financial advisory declined slightly by -5% YoY and even increased by +6% on a QoQ basis. GS stressed at its recent second-quarter earnings briefing that “clients are turning to us and looking for advice on how they can execute on what’s particularly strategic” in turbulent times, and this explains why the bank’s financial advisory sub-segment has done well.
Apart from the better-than-expected performance for some of Goldman Sachs’ businesses highlighted above, the bank’s recent dividend hike was also a positive surprise for investors. A June 27, 2022 Seeking Alpha News article had mentioned that GS is planning to raise its quarterly dividend per share by +25% to $2.50 in Q3 2022 following the “Federal Reserve’s stress test.”
Income-focused investors would have been pleased with Goldman Sachs’ performance as a dividend grower 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 appealing 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 Earnings
Looking beyond the bank’s Q2 2022 earnings, I expect GS to continue growing its recurring fee revenue, with acquisitions being a key driver.
Goldman Sachs emphasized at the bank’s second-quarter results briefing that “we remain focused on growing fee-based revenue streams across our asset management and wealth management segments.” More importantly, GS stressed that it is “not satisfied with where we are on the journey of making the firm more fee-based and more resilient.”
In an earlier section of this article, I noted the increase in Goldman Sachs’ management and related fees for the Asset Management segment in Q2 2022. The completion of the acquisition of NN Investment Partners in April 2022 was a key contributing factor, as this increased the Asset Management business’ AUS (Assets Under Supervision) by approximately $305 billion as revealed in its Q2 results presentation.
Moving forward, GS has indicated at prior investor meetings that it has the intention to rely on acquisitions to expand its wealth management and asset management businesses so as to increase recurring fee revenue.
According to a May 10, 2022 Barclays (BCS) research report (not publicly available), Goldman Sachs’ CFO Denis Coleman noted at the Barclays Americas Select Franchise Conference in early-May that the bank “expects to continue to look for tuck-in acquisitions, particularly in the asset and wealth management space.” At the Sanford C. Bernstein Strategic Decisions Conference on June 2, 2022, GS mentioned that “as we continue to grow our asset and wealth management business, we are always looking for acquisitions.”
In a nutshell, investors should expect a positive valuation re-rating for Goldman Sachs following its Q2 earnings, as the bank’s revenue and earnings become less volatile in the future with a higher proportion of recurring fee revenue.
What Is GS Stock’s Price Target Now?
The sell-side consensus price target for GS now is $391.13, which translates into a 20% upside as compared to Goldman Sachs’ last share price of $326.54 as of July 21, 2022. This warrants a Buy rating for GS.
In my view, Goldman Sachs’ consensus target price of $391.13 is reasonable, as it is equivalent to a consensus forward next twelve months’ P/E multiple of 11.1 times and a trailing price-to-net tangible book (P/NTA) multiple of 1.3 times as per S&P Capital IQ data. As a comparison, the bank’s 10-year average forward P/E and trailing P/B multiples were 10.1 times and 1.6 times, respectively.
In conclusion, the $391.13 price target for GS is achievable, when comparing the implied valuation multiples with their respective historical averages.
Is GS Stock A Buy, Sell, Or Hold?
GS stock is a Buy. Goldman Sachs’ focus on driving recurring fee revenue growth was the key contributor to the bank’s earnings beat in Q2 2022, which led to an +11% increase in its share price in the past four trading days post-results announcement. With expectations of a further increase in fee revenue contribution from asset and wealth management in the future, Goldman Sachs’ shares should continue to rise going forward.
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