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Goldman Sachs Group Inc (GS), JPMorgan Chase & Co. (JPM): One Bank to Buy, One to Hold

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While a majority of the banks in the US reported better-than-expected results for the second quarter of 2013, Goldman Sachs Group Inc (NYSE:GS) was no exception. Goldman Sachs, JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS) were classified as investment banks before they were reclassified as bank-holding companies in 2008. This article will feature an earnings review of Goldman Sachs Group Inc (NYSE:GS) including some future stock price drivers.

Goldman Sachs Group Inc (NYSE:GS)

Earnings review

Goldman Sachs Group Inc (NYSE:GS) reported earning per share of $3.70, beating estimates by a good $0.89 per share. Profits rose 107% over the prior year. Revenue of $8.6 billion for the second quarter was also $350 million ahead of estimates.

Much of the improvement in the results over the prior year was due to the bank’s investment banking unit, investing and lending unit and the one-time lower tax rate. Revenue of $1.5 billion from Goldman Sachs Group Inc (NYSE:GS)’s investment banking unit was up 29% from a year ago on 45% higher underwriting revenue. The investment banking backlog remained relatively flat compared to the first quarter. Goldman Sachs Group Inc (NYSE:GS)’s trading revenue of $2.5 billion increased 12% over the prior year. During the quarter, the bank also reported an operating expense of nearly $6.0 billion, up 14% over the same time period last year.

The future

Overall, second-quarter results were solid. However, the lack of positive stock price catalysts lead me to rate the bank neutral. I don’t find a catalyst that will move revenue a step up on a consistent basis. Over the near-term, the third-quarter expectations remain tempered. Having said that, the bank is expected to benefit from further gains from private equity investments with modest expectations for the bank’s trading unit. Barclays puts investing and lending revenue estimates at $1.1 billion for the third quarter. Additionally, analysts at Barclays forecast rather muted growth in fixed income, currency and commodities and equities.

Among the negatives the bank can face include a severe slowdown in investment banking and capital markets. A prolonged and severe economic downturn could significantly impair the banks revenue streams. Also, investment losses and regulatory risk could become the new negatives for Goldman Sachs Group Inc (NYSE:GS). If the equity market doesn’t appreciate by 8% each year, Goldman Sachs could produce significant losses in its private equity unit.

Peer analysis

As noted above, some of the closest peers of Goldman Sachs are JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS). Both JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS) surprised analysts when they reported stronger-than-expected earnings for the second quarter.

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