Investing

Earnings Previews: Goldman Sachs, Morgan Stanley, Silvergate Capital

Paul Ausick

Published: January 13, 2023 11:13 am

Stocks traded right around the break-even line about an hour after Friday’s opening bell. Premarket earnings reports from five of the country’s largest banks and others weighed on investor enthusiasm. Coupled with a price cut of up to 20% on some Tesla models, the outlook for the current quarter is not exactly robust.

Before markets opened on Friday, Delta Air Lines posted results that beat estimates on both the top and bottom lines. Despite the earnings beat and the CEO’s assurance that the market for air travel remains strong, first-quarter guidance called for earnings per share (EPS) in a range of $0.15 to $0.40, far short of a consensus estimate for EPS of $0.59. Shares traded down 3.6%.

Wells Fargo missed estimates for both profits and revenues, and the shares were trading down by 1.7%.

BlackRock beat top-line and bottom-line estimates, but revenue was down 15% year over year, and fee income also fell. Assets under management rose to $8.6 trillion on stronger-than-expected inflows. Shares traded down 0.7%.

United HealthCare beat estimates on both the top and bottom lines. The country’s largest health insurer reaffirmed earnings guidance that was below the consensus estimate, while guiding revenue above the consensus. Shares traded up 1.8%.

Bank of America also beat both top-line and bottom-line estimates, taking advantage of higher interest rates to increase net interest income and market volatility to boost trading revenue. The bank salted away $1.1 billion to cover possible credit losses. The stock traded down by 1.5%.

JPMorgan Chase was another of the big banks to hammer estimate on both the top and bottom lines. The bank set aside $1.4 billion for loan losses, commenting that it now anticipates a mild recession ahead. In the fourth quarter of last year, the bank freed $1.6 billion of reserves. Shares traded up 0.24%.

Bank of New York Mellon missed the consensus revenue estimate but beat on earnings. Revenue was hit by lower fees and investment revenue. Higher interest rates drove net interest income up 56% year over year. The bank added $39 million to its loan-loss reserves. Shares traded up 1.3%.

Citigroup reported lower-than-expected EPS but topped the revenue estimate. The bank added $640 million to its loan-loss fund compared to a release last year of $1.4 billion. Shares traded down 0.5%.

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U.S. markets are closed Monday to observe the birthday of Dr. Martin Luther King, Jr. From Taiwan, semiconductor wafer maker United Microelectronics is scheduled to report quarterly results.

First thing Tuesday morning, two more big banks will report earnings along with a regional bank that serves the cryptocurrency sector.

Goldman Sachs

Goldman Sachs Group Inc. (NYSE: GS) has posted a 12-month share price decline of about 5.2%, far smaller than any of the nation’s other biggest banks.

Goldman started cutting what eventually will be a total of around 3,200 jobs last week. On Wednesday, the firings spread globally to Goldman offices from New York to Hong Kong. The bank has also revealed that it lost $1.2 billion in the first nine months of last year on its foray into consumer banking and $3 billion since the unit’s inception in 2020. The bank’s outlook may figure more heavily into how investors respond to earnings than do the quarterly numbers themselves.

Of the 24 analysts covering the stock, 14 have a rating of Buy or Strong Buy and nine more have Hold ratings. At a recent price of around $364.50 a share, the upside potential based on a median price target of $397.50 is 9.1%. At the high price target of $495.00, the implied upside is 35.8%.

Fourth-quarter revenue is forecast to come in at $10.91 billion, which would be a decline of 8.9% sequentially and a drop of 13.7% year over year. Adjusted EPS are forecast at $5.77, down 30.1% sequentially and by 87.3% year over year. The current estimates for the 2022 fiscal year call for revenue of $47.7 billion, down 19.6%, and EPS of $32.69, down 45%.

Goldman stock trades at 9.1 times expected 2022 EPS, 10.1 times estimated 2023 earnings of $36.17 and 8.9 times estimated 2024 earnings of $41.27 per share. The stock’s 52-week trading range is $277.84 to $396.87. Goldman pays an annual dividend of $10.00 (yield of 2.7%). Total shareholder return for the past 12 months was negative 3.88%.

Morgan Stanley

Morgan Stanley (NYSE: MS) has seen its share price drop by 13% over the past 12 months. Shares have gained about 17% over the past three months, thanks primarily to higher interest rates.

Last month the bank fired about 2% of its workforce (some 1,600 jobs). The bank’s wealth management advisers appear to have escaped unscathed. The job cuts follow a demand that staff return to their offices five days a week. The bank also stands to write down its portion of a $4 billion loan to support Elon Musk’s purchase of Twitter.

According to a Bloomberg report Friday morning, Morgan Stanley, BofA and Barclays are the most exposed of the big banks to risky loans and bonds totaling some $40 billion.

Sentiment on the stock remains bullish, with 17 of 27 brokerages assigning a Buy or Strong Buy rating. Another nine have a Hold. At a share price of around $89.90, the upside potential based on a median price target of $97.00 is 9%. At the high target of $125.00, the upside potential is 39%.

The consensus estimate for fourth-quarter revenue is $12.6 billion, down 3.0% sequentially and by 13.2% year over year. Adjusted EPS are forecast at $1.31, down 14.3% sequentially and 37.0% lower year over year. For the full 2022 fiscal year, analysts are looking for revenue of $53.58 billion, down 10.3%, and EPS of $6.44, down by 21.7%.

Morgan Stanley stock trades at 13.9 times expected 2022 EPS, 12.3 times estimated 2023 earnings of $7.31 and 10.8 times estimated 2024 earnings of $8.32 per share. The stock’s 52-week range is $72.05 to $109.73, and the bank pays an annual dividend of $3.10 (yield of 3.42%). Total shareholder return over the past year was negative 9.52%.

Silvergate Capital

Not many banks are likely to suffer the way Silvergate Capital Corp. (NYSE: SI) has over the past 12 months. The stock is down 90% for the year, including a drop of almost 22% in the past two weeks alone.

The bank that tied its fortunes to being a financial services provider for the crypto industry said last week that it will take a charge of $196 million in the fourth quarter and fire 40% of its workforce. Customers withdrew $8.1 billion in digital assets during the fourth quarter, forcing the firm to issue $5.2 billion in debt at a loss of $718 million. New pressure on crypto assets from the Securities and Exchange Commission will not give investors more confidence in digital assets, and that could make Silvergate’s tenuous position even worse.

Sentiment remains slightly bullish, with four of 11 brokerages having a Buy or Strong Buy rating and five more rating the shares at Hold. At a price of around $14.30, shares are trading above their median price target of $14.00. At the high target of $38.00, the upside potential is almost 166%.

The consensus estimate for fourth-quarter revenue is negative $778 million, down from $89.34 million sequentially and from $51.7 million in the year-ago period. Adjusted EPS are forecast at $0.72, down about 44% sequentially but up 9.1% year over year. For the full 2022 fiscal year, analysts are looking for revenue of negative $525.36 million, down from $174.52 million last year, and EPS of $3.94, up 44.3%.

Silvergate stock trades at 3.6 times expected 2022 EPS, 10.3 times estimated 2023 earnings of $1.37 and 8.8 times estimated 2024 earnings of $1.61 per share. The stock’s 52-week range is $10.81 to $162.65. The bank does not pay an annual dividend. Total shareholder return over the past year was negative 89.6%.