Goldman Feeling the Heat, Downgraded by Rochdale (GS)

It is usually Goldman Sachs GS doing the downgrading, but the banking giant got a taste of its own medicine this morning as the company was cut from Buy to Neutral by Rochdale Securities analyst Richard Bove. The price target was also slashed from $188 to $163. The downgrade comes despite Goldman's blowout earnings of $1.56 per share versus estimates of $0.84 per share. Bove did, however, raise the 2011 EPS estimate from $12.60 per share to $13.66 per share. He is aware of the slight contradiction writing, “The unusual step of lowering the rating when raising the estimate is due to the fact that the earlier estimates were simply too low. It appears that trading results will be better than earlier thought. However, it does appear that the long-term earnings power of the company is lower than initially believed.” In an email, Bove gave seven distinct reasons for the downgrade: 1) The S&P downgrade of U.S. debt will result in slower economic growth. This hurts every company that I follow. 2) The burst of trading activity in the first quarter will not be sustained. It is unlikely that there will be another Mid East blowup or Japanese meltdown. India and China must cut inflation and investors have de risked their balance sheets. This hurts all traders, also. 3) The SEC and the Justice departments must take a closer look at Goldman. This could result in fines but much more important it means that the company cannot use its excess liquidity or capital until the investigations are over. This will limit growth. 4) The company must rebuild its customer relationships. It must prove that it is not working against them to gain profit for Goldman. 5) The asset management business is weak. No inflows in the first quarter as there should have been given the strong market in the fourth quarter. Incentive fees weak. 6) The investment banking business is not keeping pace with peers. 7) The gains on ICBC, the Chinese bank, and debt holdings are not likely to be repeated in the next few quarters particularly if interest rates go up as expected. The downgrade comes at a time when Goldman is feeling pressure from Capitol Hill lawmakers, most vocally from Senator Carl Levin, (D., Michigan). A Senate report, which accuses the firm of misleading Congress regarding its activities leading up to the financial crisis, has been causing concerns about possible future regulations and/or punishments for the company. In today's action, shares of Goldman were initially higher by 1.6% from yesterday's close, but a closer look at its earnings report by analysts, along with the downgrade by Rochdale, has caused shares to reverse course, currently trading down 2% on the day to $150.80. Investors have seen shares drop 14% since setting a 52-week high on January 18th of this year.