Earnings Quality At Goldman Sachs Questionable, UBS Downgrades

Shares of Goldman Sachs Group Inc GS have lost nearly 10 percent since the start of 2017, and after the company's earnings report, analysts at UBS think there are "better opportunities" elsewhere.

UBS's Brennan Hawken downgrades Goldman Sachs' stock rating from Buy to Neutral with a price target lowered from $255 to $230 due to expectations for continued weak earnings that will pressure shares.

The analyst is forecasting a 10 percent ROE (return on equity) in 2017 for the bank but this is due to a 24 percent tax rate (versus a long-term average of 28 to 30 percent) along with a $1.7 billion recovery in I&L revenues. But normalizing the tax rate and reducing the I&L revenue to the analyst's 2018 forecast would imply a ROE of just 9.3 percent for Goldman Sachs.

Meanwhile, Goldman Sachs' stock is trading at a level which implies an inflection in FICC (fixed income, currencies and commodities) revenue — something the analyst has "limited confidence in." Also, the company would need to demonstrate a "substantial" recovery in trading revenue and it would take a "surprise event" such as Brexit or President Donald Trump's election win to reverse recent weakness.

Finally, the analyst raised his 2017 earnings per share estimate from $18.45 to $18.60 due to the company's second-quarter earnings beat but more importantly his 2018 EPS estimate was lowered from $24.40 to $19.30. As such, a $230 price target implies a 12x multiple on Goldman Sachs' stock, which is consistent with its current multiple.

"Goldman continues to run a premium franchise but we have limited confidence in predicting when their trading revenues will recover," the analyst concluded.

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