Adding insult to injury, Goldman Sachs Group Inc. was downgraded by fellow broker Morgan Stanley, which cited “risks and uncertainties” surrounding the investigation into Goldman’s role in the 1MDB scandal.
Analyst Betsy Graseck cut her rating to equal weight, after being at overweight for at least the past three years. She also slashed her stock-price target by 22% to $226, which is now the second lowest of the 29 analysts surveyed by FactSet, from $291.
The downgrade comes after the stock had already tumbled 17% since reports surfaced that Goldman’s Chairman and former-Chief Executive Lloyd Blankfein met with people involved in the 1MDB scandal, who had been indicted on a charge of conspiring to launder and steal money from a Malaysian sovereign-wealth fund, 1Malaysia Development Bhd.
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The stock GS, +1.67% closed Tuesday at a 2-year low, and had plunged 43% since its March 12 closing record of $273.38. It bounced 1.6% in afternoon trade Wednesday.
Graseck said the main concerns she has over the potential fallout of the 1MDB investigation, is how long it will take to resolve the issue, what the fines and penalties could be and what costs will Goldman incur to satisfy regulators.
“These risks, coupled with potential headline risks in the coming months—additional lawsuits, additional regulatory probes, internal reviews—drive our equal weight rating,” Graseck wrote in a note to clients.
She said that while the stock’s valuation multiple has already dropped to about where it was at the depths of the financial crisis, “we don’t expect significant multiple expansion until we are closer to resolving these concerns.”
Graseck said the stock is trading at 7.1-times her 2019 earnings-per-share estimate, well below the average over the past five years of 11-times and “relatively in line with the financial crisis trough” of 7-times.
Regarding potential penalties, Graseck said Goldman had generated about $600 million in fees from debt offerings that helped raise $6.5 billion for 1MDB. She said the Foreign Corrupt Practices Act’s antibribery provisions permits fines of up to twice the amount of fees obtained, in addition to returning the fees.
“However, the final outcome is far from certain,” Graseck said, as Goldman could obtain a reduction in penalties or face additional fines and penalties for violations of other provisions or statutes.
Goldman’s stock has tumbled 23.7% year to date, while the SPDR Financial Select Sector exchange-traded fund XLF, +0.94% has lost 5.3% and the Dow Jones Industrial Average DJIA, +0.62% has slipped 0.4%.
