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Goldman Sachs Set to Benefit From Asset Strength and Earnings Prospects

Goldman has a solid asset base with earnings growth prospects in its loan and investment banking departments.

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Steve Gray Booyens
Oct 21, 2021

Summary

  • Strong Q3 results are without loan business potential.
  • The company's changing with the times with GreenSky acquisition.
  • Value metrics and Basel III test are well aligned for upside.
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Goldman Sachs (

GS, Financial) is still underperforming the S&P 500 in terms of total stock returns (excluding dividend returns). It is, however, a cyclical stock that needs to be timed, and I believe now is the ideal time to buy.

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Earnings analysis

In its third quarter, Goldman Sachs blasted past earnings estimates with a revenue beat of $2 billion and an earnings per share (EPS) beat of $4.89.

The earnings beat was fueled by strong investment banking performance as it recorded a record net revenue of $3.7 billion. In addition, Consumer Wealth also produced record revenues of $2 billion, 35% up year-over-year.

Goldman's operating expenses have dropped by 24% quarter-over-quarter but have increased by 6% year-over-year as higher technology integration costs weighed on margins.

I'm very bullish on Goldman's income statement because the firm reduced its provisions for credit losses by half. Goldman also established itself with upper market investment banking deals; the fee-based advisory services are adding to earnings quality.

Value drivers

Goldman is planning on innovating along with the times after a period of steadying the ship post-2008. The banking giant recently entered the buy-now-pay-later market with its acquisition of GreenSky. The buy-now pay-later concept has worked extraordinarily well as many consumer seek alternatives to traditional credit, and Square's (

SQ, Financial) $112.30 billion enterprise value derived from the same concept is a testimony to this.

Goldman is also looking to improve its digital cash management. It's recently teamed up with American Express (

AXP, Financial) to exploit the B2B payments space.

Lastly, Goldman could be set to benefit from a higher yield curve in the following years as a higher yield curve means it will be able to charge an additional premium on its loans.

Valuation

Goldman's stock is trading below its fair value, in my view. With a price-earnings ratio of 6.73 and a PEG ratio of 0.07, it's trading 42.19% below the sector and growing 87.53% faster than the sector's average ratios.

Goldman also has a 15.2% tier 1 capital ratio, which exceeds the 4.50% for risk by a long way. This means that its risk-weighted assets are in good shape, and its financial strength is firm.

Final word

Goldman is in a strong position. The bank has just crushed earnings, and I won't be surprised if this is sustained in future quarters. The stock is undervalued, and its asset base is strong enough to justify the value presented in its ratios.

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Disclosures

I am/we are Long GS
The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com
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