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Goldman has become a 'show-me stock,' analyst says in downgrade

  • KBW is the latest to voice doubts, lowering its rating on Goldman from outperform to market perform and cutting its price target from $260 to $230.
  • The cut comes a day after Goldman reported profit and sales that beat Wall Street expectations but fell well short on trading revenues.

Analysts are lowering their expectations for Goldman Sachs as the firm struggles to cope with a tough trading environment.

Keefe, Bruyette & Woods was the latest to voice doubts, dropping its rating on Goldman from outperform to market perform. KBW also cut its 12-month price target from $260 to $230, implying little upside from the current level. In addition, it reduced its expectations for earnings.

The moves come a day after Goldman reported earnings that easily cleared Wall Street expectations for both bottom-line profit and top-line revenue, but left the market disappointed in its dismal trading numbers. Goldman had its worst-ever quarter for commodities as part of a 40 percent decline in its fixed income, currencies and commodities trading business.

KBW analysts Brian Kleinhanzl and Michael Brown said the bigger concern is on Goldman's ability to grow revenues, "and we believe revenue growth is the real driver for shares long term."

"To us, GS has become a show-me stock, and GS would need to consistently outperform in FICC trading for more than one quarter in order for us to be more constructive at this point in time," they wrote in a research note.

Goldman shares have lagged badly this year, with the stock down 6.7 percent versus a 4.2 percent gain for the KBW Nasdaq bank index and the 9.9 percent gain for the S&P 500.

In its earnings presentation, the bank blamed a low-rate environment for some of its troubles. However, chief financial officer Martin Chavez said the firm also did not perform as well as it should have, and promised a review of "blocking and tackling," or fundamentals.

Its main rival in the investment banking business, Morgan Stanley, reported solid results Wednesday that came in part on the firm's decision to pare back its fixed income business in the difficult trading climate.

The KBW analysts said they expect a better trading environment ahead as volatility increases but expressed doubt as to whether Goldman will be able to capitalize.

Goldman "should trade at a discount to peers until longer-term concerns about the strength of the franchise are moved," they said.