Markets Upbeat on Goldman Sachs Banking Shares

Posted on | July 13, 2009 |

There was a sudden turn in equity market sentiment today after an upbeat broker report on Goldman Sachs temporarily cured the second-quarter earnings jitters, helping Wall Street open higher today.

Meredith Whitney, a reputable US banking analyst who left Oppenheimer & Co to open Meredith Whitney Advisory Group, brightened the mood on equity markets today after upping her recommendation on Goldman Sachs from ‘neutral’ to ‘buy’ - of the eight banks that Meredith covers, Goldman is the only one with a ‘buy’ recommendation. Meredith also increased her Goldman’s price target from $141.87 to $186 a share today, leaving a potential upside return of 27% from the current share price of $146.54.

In an interview on CNBC today, she stated that Goldman Sachs, which is scheduled to release its second-quarter results tomorrow, is going to post ‘enormous’ revenue from its fixed-income, currencies and commodities business. ‘Goldman is going to surprise big on the upside.’

She also predicted that the US banking sector could rise as much as 15% in the in the near term, as banks underwrite new debt and stock issuances and work through their recently raised capital to drum up new business. [1]

Meredith wasn’t the only renowned analyst to make upbeat remarks about Goldman, however. Bank of America’s Guy Moszkowski last week raised his recommendation on the bank from ‘neutral’ to ‘buy’ and upped his second-quarter earnings forecasts from $2.92 a share to $3.90, which is higher than Bloomberg’s median analyst earnings estimate of $3.52 a share. Mr Moszkowski also increased Goldman’s price target from $144 to $175 a share, saying he believes that Goldman is on track to breaking its record 2007 equity underwriting revenues. [2]

It appears as though Goldman’s second-quarter results may be quite good after all and the comments have helped improve the mood at the start of trading today, especially for the US banking sector. Shares in Goldman Sachs were up by 3.3% to $146.54, while rival Citigroup gained 3.1% to $2.67 and Wells Fargo climbed 3.8% to $23.73.

Bank of America (BoA) was among the best performing banking stocks, nevertheless, up 4.2% to $12.38 after Meredith Whitney told CNBC that the bank’s shares were the ‘cheapest’ among rival US banks. Bloomberg News, meanwhile, today reported that BoA is attempting to avoid paying billions in fees to the US government for guarantees against losses at Merrill Lynch. According to US regulators, BoA owes them as much as $4 billion, but the bank is saying that it did not sign the rescue agreement.

In the wider financial sector, century-old commercial lender CIT Group plummeted more than 26% to $1.13 after failing to convince the Federal Deposite Insurance Corporation to back its debt sales. CIT Group publicly announced that its demise would put 760 manufacturing clients at risk of failure and ‘precipitate a crisis’ for around 300,000 retailers. [3] The Wall Street Journal, meanwhile, reported that CIT Group had hired a lawyer to explore the possibility of a bankruptcy filing, but did not provide any further details.

Elsewhere, the world’s largest electronics retailer Best Buy rose 2.2% to $33.49 after Oppenheimer & Co raised its recommendation on the company from ‘perform’ to ‘outperform’ [4].

In contrast, airline companies fell today, after the Wall Street Journal reported that there may be several airline bankruptcies this winter if current conditions do not improve. Not surprisingly, shares in Continental Airlines fell 2.3% to $9.77, while UAL Corp eased 0.9% to $3.23 and Delta Air Lines dropped 1.4% to $5.82.

Financial news provider Barron’s, reported that Investment Services company Charles Schwab is planning to grow its assets by up to 10% annually, sending its share price up 2% to $16.82 this afternoon. Drugstore Walgreen also saw a rise in its share price, up 0.2% to $28.89 after Barron’s stated that is likely to benefit from President Obama’s healthcare program.

By around 3:30pm (London time), the Dow Jones Industrial Average was up by 46.02 points (+0.56%) to 8192.54, while the broader S&P 500 had climbed 3.7 points (+0.42%) to 882.83.

There were a few sudden bouts of volatility in the run up, however, perhaps due to the downbeat comments from Treasury Secretary Timothy Geithner. Mr Geithner yesterday said that the US economy still faces ‘enormous challenges’ and that ‘It’s going to be a while before we’re confident we’re going to have a strong, sustainable recovery in place’. [5]

It is important to note that Intel will be among the companies reporting tomorrow. IBM and JPMorgan Chase will publish their second-quarter earnings on Thursday followed by Citigroup, Bank of America and General Electric on Friday.

[1] Source: Financial Times (13 July 2009)
[2] Source: Bloomberg News (13 July 2009)
[3] Source: Bloomberg News (13 July 2009)
[4] Source: Bloomberg News (13 July 2009)
[5] Source: Bloomberg News (13 July 2009)

By Anthony Grech, Research Analyst, IG Index.

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