Goldman Sachs Gets Second Downgrade After Earnings

Shares of Goldman Sachs (GS) are sliding after UBS analyst Brennan Hawken downgraded the stock to Neutral as he has “limited confidence” in a revenue recovery. Last week, his peer at Keefe Bruyette also cut the stock’s rating to Market Perform, citing his view of its weakening revenue outlook following the investment bank’s second quarter results.

MOVING TO THE SIDELINES: In a research note to investors this morning, UBS’ Hawken downgraded Goldman Sachs to Neutral from Buy and cut his price target on the shares to $230 from $255 as the market seems to be pricing an inflection in their FICC revenues despite the recent weakness, suggesting a recovery is needed to justify 2018 consensus. While the analyst recognized recent weak results could rebound, he believes a recovery in trading revenues would need to be substantial as he estimates a roughly 25% rebound in FICC revenues is implied in 2018 consensus estimates. Further, trading could rebound but that has not happened over the past year for Goldman Sachs absent a surprise event such as Brexit or the Trump election, Hawken argued, adding that he has difficulty relying on such an event to justify a bullish thesis. The analyst told investors there are “better opportunities,” such as Morgan Stanley (MS). On July 19, Keefe Bruyette analyst Brian Kleinhanzl had also downgraded Goldman Sachs to Market Perform from Outperform, while lowering his price target on the shares to $230 from $260. The analyst told investors in a research note of his own that he does not expect his previous Outperform thesis for a materially better revenue outlook to emerge near-term, partially due to market activity and partially due to weak performance by the company. Kleinhanzl pointed out that Goldman Sachs has become a “show-me stock,” and it would need to consistently outperform in FICC trading for more than one quarter in order for the analyst to become more constructive.

WHAT’S NOTABLE: Last week, Goldman Sachs reported second quarter earnings per share of $3.95 and revenue of $7.89B, both above consensus of $3.39 and $7.52B. The company also said that net revenues in Fixed Income, Currency and Commodities Client Execution were $1.16B for the second quarter, 40% lower than the second quarter of 2016, due to significantly lower net revenues in interest rate products, commodities, credit products and currencies, partially offset by higher net revenues in mortgages.