Goldman backs up our bank stock shuffle with strong earnings, upbeat M&A outlook

Goldman Sachs shares jumped to near all-time highs Wednesday after the investment bank reported strong fourth-quarter results and signaled that more dealmaking is on the way. Revenue for the three months ended Dec. 31 increased over 22% year over year to $13.9 billion, far outpacing expectations of $12.4 billion, according to estimates compiled by LSEG. Earnings per share (EPS) more than doubled versus the year-ago period, coming in at $11.95 and exceeding the $8.22 expected, according to LSEG. Bottom line Goldman Sachs delivered a fantastic set of results to close out the year. We are reiterating our buy-equivalent 1 rating and price target of $650. Fourth-quarter revenue came in roughly $1.5 billion ahead of expectations, fueled by strength in both net interest income and non-interest revenue. All three key operating segments also posted stronger-than-expected revenues. Meanwhile, earnings per share more than doubled year over year. Goldman Sachs “once again ended the year as the No. 1 M & A advisor in markets,” CEO David Solomon said on the call — a vivid illustration of why we started a position in Goldman stock last month and swapped out of rival Morgan Stanley. We’re expecting to see an increase in mergers-and-acquisitions activity, as well as initial public offerings, in 2025. Goldman is a better, more focused way to ride that expected M & A wave. “There has been a meaningful shift in CEO confidence, particularly following the results of the U.S. election,” Solomon said, in another encouraging remark for our thesis. “Additionally, there is a significant backlog from sponsors and an overall increased appetite for dealmaking supported by an improving regulatory backdrop. The combination of these conditions should spur further activity in 2025.” CFO Denis Coleman added: “While there remained some policy uncertainty, there is an expectation that the regulatory burden will be reduced, which should serve as a tailwind to risk assets and capital deployment. We are optimistic on the outlook for 2025 and expect to further pickup in M & A and IPO activity.” Indeed, Goldman’s investment backlog rose sequentially in the fourth quarter, Coleman said. Goldman Sachs (GS) Why we own it: Goldman Sachs is our bet on a rebound in dealmaking as the regulatory environment once President-elect Donald Trump returns to the White House next week. Initiation date: Dec. 19, 2024 Most recent buy: Jan. 7, 2025 Competitors: Morgan Stanley, JPMorgan, Bank of America and Citigroup Goldman’s headline numbers were especially high quality, judging by its performance on multiple metrics that all investors use to grade bank results. Those metrics include the efficiency ratio and return on tangible common equity, or ROTCE. We also loved Goldman’s cash returns to shareholders in the October-to-December period. The firm repurchased $2 billion worth of shares in the quarter— 3.5 million shares total — at an average purchase price of $566.27, a solid level given shares are now above $600 on Wednesday. It also paid out another $965 million in dividends. Goldman’s total capital returned to shareholders in 2024 came in at a record $11.8 billion, with 68% of that coming from buybacks. It’s still early in the year, of course, but we’re feeling good about moving into Goldman based on these results and management’s optimism on the call. An added kicker is that the firm’s challenged “platform solutions” segment is becoming less of a drag on profitability. Quarterly commentary As we can see in the chart above, the world’s premier investment bank delivered a nearly flawless quarter across its most important line items. While non-compensation expense was a bit higher than expected, it was nonetheless lower than the year-ago period and more than offset by efficiency gains elsewhere. We can see that in its very strong efficiency ratio , which came in well below expectations at 59.6% versus the 66.9% consensus, according to FactSet. Lower is better on this metric. “Operating efficiency remains one of our key strategic objectives,” Solomon said on the call. “And while we have made progress, we believe there are significant opportunities to drive further efficiencies across our business. We have established a three-year program as a part of our business planning process that will help us dynamically manage our expense base, harness technology and automation, and reinvest in our businesses.” Return on tangible common equity , another crucial metric when it comes to valuing financial institutions, also was well above expectations at 15.5% in the fourth quarter. Investors look to ROTCE as a means of gauging the appropriate multiple on tangible book value , which is the measure of a firm’s assets minus its liabilities and intangible assets such as goodwill. On a per-share basis, Goldman’s tangible book value of $316.02 outpaced the consensus estimate of $315.45. When both of these metrics outpace Wall Street’s expectations, as they did this quarter, it’s a pretty positive sign that investors may be willing to pay a greater premium for the stock going forward. That dynamic is often called re-rating higher. Goldman’s common equity tier 1 ratio, which indicates a financial institution’s ability to withstand stress in the financial system, was well above the 13.7% minimum. A CET1 ratio like that means Goldman is not only well-positioned to withstand financial stress, but it’s also in a position to continue returning cash to investors via buybacks and dividend payments. Revenue in Goldman’s global banking and markets segment , by far the biggest of its three, rose 33% year over year. This was driven by a 32% increase in equities revenue, 24% growth in investment banking fees — increased equity and debt underwriting activity — and a 35% rise in fixed income, currency and commodities (FICC) revenue. Asset and wealth management revenue, up 8% year over year, was fueled by record management and other fees. Roughly half of the segment’s revenue comes from asset management and wealth management fees. The rest is tied to things including equity investments, incentive fees and private banking. Client assets within wealth management — consisting of assets under supervision, brokerage assets and deposits at online bank Marcus — came in at roughly $1.6 trillion. Total assets under management exited the year at an all-time high of $3.14 trillion, up $325 billion from the end of 2023. Growth was seen in all asset classes and client channels. “In asset wealth management, we’ve consistently grown our more durable management and other fees in private banking and lending revenues, both of which were a record in 2024,” Solomon said on the call. “Notably, management and other fees surpassed 10 billion, exceeding our 2024 target.” The fourth quarter represented the “28th consecutive quarter of long-term fee-based net inflows,” Solomon added. Platform solutions revenues — home to Goldman’s partnership with Apple for the latter’s branded credit card offering — were up 16% year over year, driven entirely by an 18% increase in consumer platforms. However, the growth primarily reflects “mark-downs related to the GreenSky held for sale loan portfolio” in the year-ago period, according to a company release. Goldman officially sold GreenSky, its troubled foray into consumer home improvement lending, in March 2024 . Despite platform solutions’ annual revenue growth, the segment reported a loss in the quarter and for the full year. It is therefore a drag on the firm’s overall return on equity – to the tune of roughly 75 to 100 basis points, equal to three quarters to a full percentage point. There’s some reason for optimism, though. On the call, Solomon said he expects the segment to breakeven on a pre-tax basis in 2025, with the Apple Card “driving toward profitability” being a key factor in how quickly platform solutions goes from a drag on return on equity, to neutral, to a positive contribution. Longer-term, Solomon is preparing for the partnership, which is contracted until 2030, to wind down. “Whether it’s [terminated] in the medium term or through the life of the contract, that’s not going to be a long-term business for the firm,” he said. “And that will ultimately allow us to exit and return capital.” CNBC reported in September that JPMorgan was in early discussions to take over the Apple Card from Goldman. (Jim Cramer’s Charitable Trust is long GS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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The logo for Goldman Sachs is seen on the trading floor at the New York Stock Exchange in New York, November 17, 2021.

Andrew Kelly | Reuters

Goldman Sachs shares jumped to near all-time highs Wednesday after the investment bank reported strong fourth-quarter results and signaled that more dealmaking is on the way.