Goldman Sachs (NYSE:GS) is known for a few things, and one of them frequently delivers earnings numbers well above analysts’ estimates. It’s no surprise, then, that investors were disappointed by the bank’s rare failure in its recent fourth quarter report. In this crazy live Video clip recorded on January 20Fool contributors Matt Frankel and Jason Hall discuss whether Goldman looks like a smart stock to buy on a downside.
Matt Frankel: Goldman Sachs was actually pretty big after earnings. Goldman is known for, if analysts are expecting, say, $8 a share of earnings, Goldman will show $15. They are well known for blowing up expectations every quarter. You know this trend. It was a rare miss on Goldman Sachs’ bottom line, they missed earnings expectations. The main reason I mentioned expenses is that their operating expenses were up 23% year over year and were $500 million higher than what analysts thought. they would be.
It’s a recipe for missing gains here. A higher salary was a big reason they cited. Overall, Goldman had a good year, maintained its number one share in M&A equity underwriting, investment banking revenue grew 45%. Listen to this. Goldman produced the highest all-time revenue and earnings for the bank in 2021, $59.45 earnings per share. That means the stock is trading for Western at six times its trailing earnings. Six times. Looking ahead, and here’s my theory as to why Goldman isn’t profiting as much from rising interest rates as its counterparts.
Jason Hall: Yeah, actually, there could be challenges to a lot of mergers and acquisitions and that sort of thing.
Frankel: To the right. Rising interest rates and inflation could certainly slow mergers and acquisitions, could slow debt underwriting, in particular. Companies don’t want to issue new debt when interest rates are higher. Their consumer banking division is currently about 2% of their revenue, it’s growing fast, but it’s 2%. They cannot pass on the benefit of higher interest rates to their customers in the same way as a Bank of America (NYSE: BAC) would like.
Room: Yeah and the other thing as well is we’ve also seen you were talking about credit quality and with Bank of America the flip side because Goldman is developing this commercial bank and actually had to increase their provisions a bit for credit losses because their credit card business is growing so fast that they haven’t figured it out. It’s artificial, but they didn’t get this increase in income by freeing up capital.
Frankel: Yeah. I’m a big bull on Goldman Sachs when it comes to their consumer banking potential and people who listened to me know that. They just got into the credit card business about a year and a half ago?
Frankel: They have Apple (NASDAQ:AAPL)they have General Engines (NYSE:GM). Any bank would love to have Apple as a credit card partner. It’s a pretty impressive first.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.