(GS) Goldman Sachs Group 2011 Second Quarter Earnings Preview

The Goldman Sachs Group Inc. (GS) is scheduled to report its second-quarter 2011 results before the opening bell on Tuesday, July 19.

The Zacks Consensus Estimate for the second quarter is $2.42 per share, representing a decline of about 12% from the year-ago quarter.

We expect Goldman to benefit from its well managed global franchise, strong capital base and industry leading position in trading and asset management. Moreover, improved client activity and overall revenue enhancement in the last qaurter, along with Goldman’s prudent business model and strong fundamentals, are expected to deliver better earnings. However, regulatory issues, including lawsuits, are expected to dent the financials of the company in the upcoming quarters.

Previous Quarter Performance

Goldman’s first-quarter 2011 earnings per share of $1.56 outpaced the Zacks Consensus Estimate of 79 cents, but compared unfavorably with $3.79 in the prior quarter and $5.59 in the prior-year quarter. Results included a preferred dividend of $1.64 billion related to the redemption of Goldman’s Series G Preferred Stock. With improving economic conditions, the company gained from a solid balance sheet and global clients growth. The total revenue increased compared with the prior year. However, a poor performance was recorded in the Institutional Client Services division. Also, operating expenses increased.

Net income applicable to common shareholders in the quarter was $908 million compared with $2.2 billion in the prior quarter and $3.3 billion in the prior-year quarter.

Earnings Estimate Revisions – Overview

Prior to the results, earnings estimate significantly decreased from $2.76 to $2.42 over the last 7 days. The decline in estimates indicate weakness in the stock.

Agreement of Analysts

Looking at the estimate revision trends, it is quite clear that analysts are in agreement with the bearish second-quarter earnings outlook for Goldman. Of the 19 analysts covering the stock, four have lowered their estimates over the last 7 days.

Moreover, for FY11 and FY12, five of the total analysts have decreased their estimates over the last 7 days. This indicates strong downward pressure on the performance of the stock in the near term.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the second quarter plummeted to operating earnings of $2.42 per share from $2.76 over the last 7 days. Moreover, estimates for FY11 moved down from earnings per share of $13.27 to $12.71. For FY12, estimates dropped from $18.22 per share to $17.91.

Earnings Surprise

Goldman’s performance has been volatile over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 39.7%.

By and Large

In June 2011, Goldman announced the sale of its mortgage-servicing subsidiary, Litton Loan Servicing to Ocwen Financial Corp. (OCN) for about $263.7 million. The transaction will provide Ocwen with $41.2 billion of servicing portfolio in the form of unpaid principal balance primarily related to non-prime residential mortgage loans. Moreover, it would provide Goldman with the servicing platforms based in Houston and Dallas. The acquisition is expected to close in the late third quarter or early fourth quarter of 2011.

Even in a volatile macro environment, Goldman continues to invest in client franchise and foresees new market expansion. In March 2011, the asset-management unit of Goldman agreed to acquire India’s Benchmark Asset Management Co. (BAM), a big provider of exchange-traded funds (ETFs).

However, sluggish lending activity remains the major concern for Goldman at this point. As net interest margin (NIM) remains under pressure, its traditional banking businesses may face challenges. Moreover, with the new banking regulations, pressure on fees and loan growth is expected to remain feeble. We expect NIM to remain depressed at least till the end of 2011.

Conclusion

The estimate revision trends and magnitude of revision reflect a significant likelihood of downward pressure on the shares over the near term.

Goldman currently retains its Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating. Moreover, considering the company’s business model and fundamentals, we have a long-term “Underperform” recommendation on the stock.

Close on the heels of Goldman, among other major banks, is Morgan Stanley (MS), which is scheduled to report on July 21.

GOLDMAN SACHS (GS): Free Stock Analysis Report

MORGAN STANLEY (MS): Free Stock Analysis Report

OCWEN FINL CORP (OCN): Free Stock Analysis Report

Zacks Investment Research

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