Before market opening on Jan. 15, Goldman Sachs (GS, Financial) released its fourth-quarter and full-year earnings results for fiscal 2019.
Revenue for fourth quarter came in at $9.96 billion, an increase of 23% compared to the prior-year quarter and up 20% compared to the third quarter of 2019. Net income was $1.92 billion, a 24% decrease from the prior-year quarter but a 2% increase from the third quarter, while diluted earnings per share came in at $4.69, reflecting a 22% decrease from the prior-year quarter and a 2% decrease from the third quarter.
While revenue was higher than analysts' expectations by $1 billion, driven by strong growth in key financial products such as fixed income, currencies and commodities financing and investment banking, net income and earnings per share were hit with a $1.1 billion litigation bill, causing them to fall short of predictions of $5.47.
For the full year, revenue was $36.54 billion, net income was $8.46 billion and diluted earnings per share were $21.03, marking an increase of 9%, a decrease of 15% and a decrease of 17%, respectively.
As of Jan. 15, the financial services company has a market cap of $87.29 billion, a price-earnings ratio of 10.98 and a cash-debt ratio of 0.33. It has a three-year revenue growth rate of 7.9% and a three-year earnings per share without non-recurring items growth rate of 27.7%. According to the Peter Lynch chart and the Graham number, the stock is slightly undervalued.
Top earnings drivers
The full year saw the second-highest investment banking revenues in the company’s history, as well as record FICC financing and wealth management sales. Investment banking saw a 13% increase from the third quarter, while asset management was up 85% and consumer and wealth management grew 7%.
Growth in the company’s investment and wealth management products was driven by higher equity markets and the resulting stronger faith in the ability of such products to produce solid returns.
Net interest income on loans increased to $4.36 billion for 2019, compared to $3.76 billion in 2018.
“Strong performance in the fourth quarter helped us to deliver solid results for the year, while continuing to invest in new businesses. We aim to drive higher returns in the future, and look forward to sharing our strategic goals and financial targets at Investor Day later this month,” Chairman and CEO David M. Solomon said on the earnings report.
Headwinds
Perhaps the biggest detractor from 2019 profits was the $1.1 million in litigation fees that Goldman Sachs paid to regulators in settlement for allegations that the bank overlooked signs of corruption at a Malaysian Fund called 1MDB, which it sold bonds for in exchange for fees.
While investment banking saw its second-highest quarter in the company’s history, its revenue was down 6% compared to the prior-year quarter due primarily to a reduction in advisory and corporate lending fees. Merger and acquisition activity was down in the fourth quarter, driving down the market-wide demand for these services.
2020 outlook
Goldman Sachs announced last week it will be reorganizing itself to be more like other big-name banks on Wall Street, such as Bank of America (BAC, Financial) and JPMorgan Chase & Co. (JPM, Financial).
In order to do so, it will be expanding its digital retail banking and credit card operations. The reorganization will help to diversify the company’s revenues streams.
It will be dissolving its investing and lending division, reorganizing its operations across a new company-wide classification in order to lessen the impact of these volatile operations on any one division. The bank will classify its new divisions “global markets,” “investment banking,” “asset management” and “consumer and wealth management” as apposed to the previous classifications of “institutional client services,” “investment banking,” “investment management” and “investing and lending.” The new classification highlights the company’s new focus on retail operations.
Chief Financial Officer Stephen Scherr previously hinted at the upcoming changes in an October conference call:
“We’ve been taking commentary and perspective from investors and from you in the context of where there’s been some frustration. I hear it loud and clear in the context of frustration with I&L, as an example, and so we’re going to guide ourselves in the direction of segments to meet some of what all of you have been asking for.”
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful analysis or consult registered investment advisors before taking action in the stock market.
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