Bank of America (BAC, Financial) beat earnings estimates, but Goldman Sachs Group Inc (GS, Financial)'s stock has dropped more than 1% yesterday on the back of the bank posting its financial results for the second quarter, which ended June 30. The bank reported a revenue decline of 12.6% year-over-year to $7.93 billion, caused by an 11% decline in investment banking revenue and a 17% decline in underwriting revenue. Further, the financial advisory revenue of $794 million was down 3% as M&A slowed down. Despite those figures, the results exceeded the analysts’ estimates by 72 cents in EPS and also beat revenue expectations by $350 million.
Apart from quarterly results, the bank is working to make savings of $700 million in a cost-savings program which will offset the revenue slowdown. Goldman Sachs is also focusing on investment management because of its stable business that has almost doubled since the financial crises. Other areas such as retail and commercial banking are also important drivers for future growth.
We must mention that the company is a systemically financial institution which means that additional shocks could affect the financial system liquidity. This could give the bank an opportunity to gain market share.
One of the largest shareholder of the bank at the end of the first quarter was Warren Buffet, with 10.98 million shares. Moreover, Caxton Associates (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Tom Gayner (Trades, Portfolio) have taken long positions with 71,480; 219,600 and 3,600 shares, respectively. On the other hand, the bearish sentiment was provided by Steven Cohen (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Ken Heebner (Trades, Portfolio), all of them sold out the stock in the past trimester.
Regarding valuation, the stock sells at a trailing P/E of 18.19, trading at a premium compared to a median of 16.9 for the industry. To use another metric, its price-to-book ratio of 0.89 indicates a discount versus the sector average of 1.08 while the price-to-sales ratio of 2.52 is below the industry median of 3.46. Two ratios indicate the stock is relatively undervalued, and so a potential buy can be taken. Most analysts have a bullish opinion on the bank: 1 Sell Rating(s), 11 Hold Rating(s) and 10 Buy Rating(s).
When looking at the consensus price target, it stands at $182 according to MarketBeat, giving almost 13% downside potential. The share price has plummeted by 24% when compared to its closing price of one year ago, and the year-to-date return for the stock is negative 10%.
Final Comments
Taking positions in banks will be a great choice for your long-term portfolios, despite an unchanged federal funds rate in the near term that could make the environment a bit difficult. Goldman Sachs has a high reputation which makes it attractive and now it could be an excellent opportunity to enter into a revenue-generating company, in a market that sooner or later is going to have a peak.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
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