Goldman Sachs Group, Inc.

Fundamentals

##Symbol## GS

Goldman Sachs reports earnings Wednesday morning before the market opens. There is a clear bullish and bearish thesis for the company, and we'll review both as we walk through the fundamentals. But, we must note that earnings estimates have come down just in the last few weeks. Revenue estimates have dropped from $8.8 billion to $8.4 billion and EPS estimates have dropped from $3.74 to $3.70. Nonetheless, the stock is rising.

There is a distinct possibility that GS surpirses Wall St. with earnings numbers (high or low) that are quite different from the moving target of late. I don't think anyone (outside of the firm) has very good visibility into an already difficult to forecast M&A and trading market. I'm looking for a surprise.

The bottom line is, if interest rates rise and the US economy "holds it together," Goldman Sachs may be a phenomenal interest rate play. Coupled with a possible hot M&A market, that would be the bullish investing thesis for GS. Couple that with lowered expectations for the quarter, and an earnings beat is certainly possible.

The bearish thesis surrounds the reality that Goldman Sachs was once considered the best of the best in a way that was almost undefinable. The company recruited people from the same hedge funds or top universities that its competitors did, but somehow, "Goldie" was always the best. Then there was a little known story about high frequency trading and routes together with possible front running that seemed innocuous enough, but in fact has hampered Goldie's business.

But what really happened to GS was that it became a "bank" during the height of the financial crisis, regulations tightened, and all of sudden the magic was gone. The bearish thesis surrounds one of competition and no real differentiator between this firm and the segment at large. In most businesses that means it would be time to innovate, but innovation in big banks is kind of a unicorn. Some people have said they've seen it, but no one has real proof.

But there's a lot to this firm, so let's dig in.

Goldie is doing one thing semi-innovative, which is attempting to break into the ETF world. And this is Goldie, so, the firm hired Tony Kelly – the founding member of BlackRock, Inc.’s BLK iShares capital markets.

BLK is best known for iShares, the most successful ETFs ever. Goldie will be delivering about half a dozen actively managed and half a dozen passively managed ETFs. There's hope that the move into this field could start to the firm an edge. GS is also at the forefront of M&A which has had its boom. The firm also stands to make a lot of money if interest rates rise and the US economy doesn't stall.

GS has seen revenue (TTM) rise over both one- and two-years by 7.10% and 4.41%, respectively. But those are mightily unimpressive numbers (though in line with its peers). The firm is seeing operating margins and net income rise, but also at unimpressive rates while cash from operations is dropping significantly.

Technicals | Support: 209.02 | Resistance: 218.4

Golden Cross Alert: The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

GS has a five bull (top rated) technical rating because it's trading above its 10-, 50-and 200- day moving averages and the stock is up on the day.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.

EARNINGS ESTIMATES
Earnings Date	EPS	Revenue (Mean)	Revenue (Median)	Last Quarter (Actual)
2015-07-16	$3.70	$8.4 B	$8.5 B	$10.6 B	Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	35,817	33,444	34,304	RISING
Operating Margin (QTR)	1.638	1.54	1.53	RISING
Net Income (TTM US$ Millions)	9,288	7,813	7,626	RISING
Cash from Operations (TTM US$ Millions)	3,317	6,020	3,405	FALLING

Stock Returns and Chart

GS is up +8.5% over the last three months and up +14.7% over the last six months. The stock price is up +28.7% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	35,817	33,444	34,304	RISING

Revenue over the trailing twelve months (TTM) for GS is rising but we're talking about a 7.10% year-over-year rise and a two-year change in revenue (TTM) of just a 4.4%. You'll see the chart is kind of "blah."

What do all these numbers mean?
GS's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Operating Revenues/Operating Expense	1.638	1.54	1.53	RISING

Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter GS showed a ratio of 1.64. The trend however is totally flat. While an operating margin of 1.64 is really strong fundamentally, the trend is totally dead.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.54. In the last year we can see operating margins are increasing and are also currently greater than 1.0 (the critical level).

GS's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was positive (raises the rating).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.


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METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Net Income (TTM US$ Millions)	9,288	7,813	7,626	RISING

Just like operating margins, while the raw numbers are quite good, the trend in net income (TTM) is looks flat. But looks can be deceiving. If we hyper focus on a year-over-year change we actually see a 19% rise. Shh... Something may be happening at Goldman Sachs.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line.


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METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Cash from Operations (TTM US$ Millions)	3,317	6,020	3,405	FALLING

This is a really ugly chart and trend. Cash from Operations (TTM US$ Millions) is down -45% year-over-year and down massively since 2012.
For our next chart we plot Cash from Operations (TTM US$ Millions) in the blue bars through time.



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Tale of the Tape

In our final visualization, we take a look at nine critical fundamental measures (many of which we have examined above), comparing GS to two more peers (MS and AXP).


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So far everything has been rather bland for GS. It's this final visualization where we see that GS may simply be the best of breed, even if the breed itself is not very impressive. Let's examine GS vs Morgan Stanley and American Express across nine critical metrics in one image.

Let's go row-by-row. Across the top we can see that GS generates more revenue, earnings and revenue per employee than its peers. In row wo we see that the firm has higher margins across the board as well. Finally, in the last row we can see that revenue is growing faster at Goldie than the rest, although earnings are growing fastest at Morgan Stanley. The final chart in the lower right hand side shows that all firms have very similar price to sales ratios (valuations).

Summary
M&A is a huge win for Goldman Sachs as it still very much is the best of breed. M&A yields big margins and big money for the firm at a time when M&A is (was?) exploding. But, we do see signs that M&A may be slowing. A bet on Goldie is a two-fold bet. One is that the firm continues to simply be "better" than its peers, even thought that "special edge" is shrinking. The other bet is either that M&A continues to do well, or that interest rates rise while the economy does not stall. Higher rates for GS means a lot more money on interest rate spreads and MUCH higher earnings.

A bearish thesis notes reduced earnings estimates and a potentially "bubblish" M&A market that must slow down (right?).