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Goldman Sachs: A Strongest Investment Bank

August 02, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at The Goldman Sachs Group, Inc. (GS), a $77.3 billion market cap company, which is one of the world's leading investment banking and securities companies.

Well-Positioned

Goldman will remain profitable and so we think will earn above industry average returns on capital. The bank plans to lower its financial leverage to comply with Basel III regulatory capital requirements. It will reallocate capital from lower-to higher-return on regulatory capital businesses. Since the 2008 crisis, the bank has cut balance-sheet risk by increasing capital so as to absorb losses in case the bank needs it.

Cost cutting should improve profitability as well as its business diversification or reduction of some areas such as principal investments and mortgage securitization. This decision may also reduce earnings volatility and improve the balance sheet.

Differentiation

In the investment banking segment, Goldman differentiates because of its distribution platform as well as the extensive web of relationships. Further, Goldman has built a good reputation to hire top talent. Moreover, the firm has a solid history of strong growth as well as returns due to advantages, such as technology and risk management.

Attractive Dividend Policy

Since 1999, Goldman has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. Although the current dividend yield is not too high, it can improve in the future allowing higher shareholder´s returns.

Revenues, Margins and Profitability

Looking at profitability, revenue growth by 2.44% led earnings per share increased in the most recent quarter compared to the samequarter a year ago ($4.1 vs $3.7). During the past fiscal year, the firm increased its bottom line by earning $15.47 versus $14.15 in the prior year. This year, Wall Street expects an improvement in earnings ($16.80 versus $15.47).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

GS

Goldman Sachs

10.25

JPM

JPMorgan Chase & Co.

8.49

RJF

Raymond James Financial Inc.

10.02

 

Industry Median

7.87

The company has a current ROE of 10.25% which is higher than the one exhibit by its peers JpMorgan Chase (JPM) and Raymond James (RJF). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1406937641966.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 11.3x, trading at a discount compared to an average of 23.8x for the industry. To use another metric, its price-to-book ratio of 1.1x indicates a discount versus the industry average of 1.51x while the price-to-sales ratio of 2.5x is below the industry average of 3.83x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $11.624, which represents a 3% compound annual growth rate (CAGR).

1406937603777.png

Final Comment

As outlined in the article, Goldman has a history of successful margins, as well as the ability to change or adapt its business model. Management and other top-talented people are capable of outperform the competition.

Further, the stock's relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Ken Heebner (Trades, Portfolio), David Dreman (Trades, Portfolio), Scott Black (Trades, Portfolio), John Buckingham (Trades, Portfolio) and John Rogers (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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