Goldman Sachs will release its quarterly report next Tuesday, and the investment bank has done an impressive job over the past year of bolstering its business fundamentals and boosting its share price. But even with an expected rise this quarter, will Goldman Sachs' earnings continue to grow fast enough to justify its current stock price?
Goldman Sachs drew plenty of criticism during the financial crisis because of the role it played in facilitating some of the sophisticated transactions that eventually brought the global financial system to the brink of collapse. As regulators have clamped down on the banking industry, Goldman has continued to look for ways to earn profits from its wide variety of different businesses. Let's take an early look at what's been happening with Goldman Sachs over the past quarter and what we're likely to see in its quarterly report.
Stats on Goldman Sachs
Analyst EPS Estimate
Change From Year-Ago EPS
Change From Year-Ago Revenue
Earnings Beats in Past 4 Quarters
Source: Yahoo! Finance.
Will this quarter be the last big jump for Goldman Sachs earnings?
In recent months, analysts have had mixed views on the earnings prospects for Goldman Sachs, cutting nearly a dime per share from their June quarter estimates, but boosting their full-year consensus by $0.37 per share. The stock has continued its upward trajectory, rising 8% since early April.
Much of Goldman's earnings rebound has come from a combination of a strong environment for bond issuance and smart internal moves within the investment bank. In its first quarter, Goldman used tactics like cutting its compensation-to-revenue ratio to help it boost its return on equity. Meanwhile, even though its trading revenues fell, rising corporate debt activity provided an offset, helping the bank grow its total revenue by 9%.
Goldman has also made a number of high-profile investments recently, not all of which have panned out. In May, the company said it would invest in a $500 million fund to help SolarCity provide financing for its residential solar-installation customers, seeking to cash in on the trend toward smaller solar projects. Yet Goldman's bid to take insurance-software companyEbix private didn't turn out as well, as the launch of an investigation by federal prosecutors last month led the investment bank to walk away from its proposed $820 million purchase offer.
Still, the big threat to Goldman remains regulation, and it appears that under new standards from the FDIC and the Federal Reserve, the bank will have to take steps to shore up its capital reserves even further. With calls to raise capital-to-asset ratios to 6% for the most systemically important financial institutions, both Goldman and peer Morgan Stanley will have to increase their capital positions, along with several retail banks. Those standards could make smaller players on Wall Street more attractive, as they'd be able to use greater leverage to take advantage of profitable opportunities.
In Goldman's report, watch to see how CEO Lloyd Blankfein moves forward in applying his economically optimistic attitude toward the company's business. Moreover, pay particular attention to the impact of higher interest rates on Goldman Sachs earnings, as rates could continue to rise if the Fed begins slowly to ease off on its stimulative monetary policy going forward.
In terms of investor reputation, one bank stands above Goldman and its peers. Read all about the only big bank built to last in The Motley Fool's new report, which goes through the industry to find a Buffett-approved stock with big potential. The report is free, so click here to access it now.
Click here to add Goldman Sachs to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Goldman Sachs Earnings Are Set to Soar originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Ebix and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.