Goldman Sachs could profit as IPO and merger activity ramp up: analyst

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Goldman Sachs Group Inc.’s stock was initiated with a buy rating at Edward Jones on Tuesday on expectations the it will outpace other financial stocks over the next five years as capital-market activity picks up.

Analyst James Shanahan said a stronger environment for mergers and acquisitions as well as for initial public offerings “could be a strong catalyst for revenues and earnings” at Goldman Sachs

Goldman Sachs’s stock was up by 0.2% on Tuesday. The stock is one of 30 components of the Dow Jones Industrial Average
which fell 0.4% in recent trading. So far in 2024, Goldman Sachs stock is up by 1.3%, below the 3.2% rise by the Dow.

Goldman has realized “solid” market-share gains in fixed-income underwriting and fixed-income trading, Shanahan said.

However, its investment banking unit’s revenue in 2023 was the lowest in many years as Wall Street dealmaking dropped sharply in the face of rising interest rates and geopolitical turmoil.

With interest rates now stabilized, merger activity has started to pick up in some pockets, and the drought in major U.S. initial public offerings seen in late 2023 has ended.

Also read: IPO freeze gives way to cautious optimism as dealmakers see signs of a thaw

Shanahan said the current share price for Goldman Sachs marks an “attractive entry point” for long-term investors.

The stock is expected to generate annualized total returns of 11% in the next year, which is below the 15% estimate for the 72 stocks in the S&P Financial Services Index over the same period of time.

But over the next three years, it’s expected to have an annualized total returns of 10%, ahead of the 9% projection for S&P Financial Services stocks. In five years, it’s expected to produce annualized total returns of 18%, outpacing the 11% projection for S&P Financial Services stocks and the 15% projected annualized total return of the S&P 500

Shanahan also added Goldman Sachs to the Edward Jones U.S. Stock Focus List and U.S. Equity Income Buy List.

Downside risks for Goldman include sustained weakness in capital markets and slack performance for its assets under supervision, sharply higher capital requirements and potentially thorny legal or regulatory developments.

Jones praised efforts by Goldman Sachs Chief Executive David Solomon to pivot the bank away from its money-losing push into consumer banking and focus instead on money-management fees.

Also read: Goldman Sachs sheds GreenSky lending platform but still faces lack of low-cost deposits, analyst says

“[Goldman Sachs] is de-emphasizing consumer finance and focusing more on growth in asset and wealth management, which should drive a greater proportion of recurring revenues,” Shanahan said. “Over time, these developments should reduce earnings volatility and improve profitability.”

Also read: Citigroup’s stock wins another upgrade as analysts cheer turnaround plan


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