Goldman Sachs 'in total disarray' as CEO Solomon tries to get back on track
Financial giant Goldman Sachs missed earnings expectations for the third quarter, breaking a streak of surprises to the upside, and one expert predicts trouble could be here to stay for the near-term.
Rafferty Capital Markets chief financial strategist Dick Bove told FOX Business on Tuesday that Goldman Sachs is in “total disarray right now,” after getting rid of a slew of top executives.
“They’re in total turmoil because [former CEO] Lloyd Blankfein and [former president] Gary Cohn took this thing in the wrong direction for 10 years and [CEO] David Solomon understands that and he’s trying to turn this ship around,” Bove told FOX Business’ Maria Bartiromo. "And he’s going to have a lot of trouble doing it."
The company reported earnings for the third quarter that came in below Wall Street’s expectations. Profits declined 26 percent to $1.88 billion, or $4.79 per share vs. estimates of $4.81. Revenue fell 6 percent to $8.32 billion.
There are concerns that Goldman is increasing variable income streams, but not its sustainable core income.
The fact that they could do so well in terms of their investment banking activities, both in terms of IPOs and in terms of mergers, and come up with numbers like this is terrible — it’s just not good at all.
In a note to clients on Tuesday, researchers from Keefe, Bruyette and Woods said results were mixed, but the top-line beat was driven “more by trading,” which tends to be less persistent.
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“Investment banking results were weak,” researchers wrote. “Further a miss on provision is a negative trend for investors at this stage of the economic cycle.”
On the other hand, Devin Ryan, senior capital markets analyst at JMP Securities, told FOX Business, that he is bullish on the overall strategy and less concerned about the quarter-to-quarter ebb and flow.
If you're going to like Goldman Sachs it's not becase the third quarter was good or not. The transformation taking place at this moment is going to be powerful.
Ryan sees opportunity for the firm in some of the growth initiatives it has been investing in, while it may experience more moderate growth in the legacy parts of its business.
The company took an $80 million hit from an investment in struggling shared office startup WeWork, which was forced to put off a planned initial public offering and is exploring ways to raise cash. On Tuesday, WeWork bonds were trading below 80 cents on the dollar.
Ryan noted that the public markets don't always see eye-to-eye with the private markets on companies that are going public.
Bove said that Goldman Sachs CEO David Solomon wrote off a lot of bad investments made by his predecessors and is making decisions that are necessary after years of mismanagement.
It’s going to take some time for Goldman Sachs to get where people want it to be.
Ryan expects the investments the firm has been making to start generating positive return in the coming years, which will reassure the broader market.
"2020 will be a big year and 2021 will be an even bigger year," Ryan said, "Right now we're looking at the opportunity vs. the reality."
Shares initially dipped during the trading day on Tuesday, before recouping losses to end the day in the green.
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