Goldman Sachs Group Inc (GS)

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Goldman Sachs Stock Looks Cheap Ahead of Earnings
By: Barron's | April 13, 2022

The glow on Goldman Sachs Group has faded in recent months after blowout financial results in 2021. Yet its stock still looks appealing at a discounted valuation relative to earnings and book value.

Shares of Goldman Sachs (ticker: GS) now trade for under nine times projected 2022 earnings of about $37 a share and for just 1.1 times its year-end 2021 book value. Industry leader JPMorgan Chase (JPM) fetches around 1.5 times book.

Indeed, Goldman is among the cheapest plays on Wall Street. It trades at a discount to JPMorgan, Morgan Stanley (MS), and Bank of America (BAC) which all fetch around 11 times projected 2022 earnings. Only Citigroup (C) is cheaper, trading at discount to tangible book and for under eight times earnings.

In trading on Wednesday, Goldman shares were down 1.1%, at $316.19. The shares are off 25% from a November peak of $426.

Investors are concerned that Goldman’s earnings power—which is driven by trading results and investment banking—will downshift in 2022 after a phenomenal 2021, when it earned a record $59.45 a share, more than double the nearly $25 a share in 2020.

Wall Street will be scrutinizing Goldman’s first-quarter earnings Thursday for a read on its earnings power in a less favorable environment for investment banking. The current consensus estimate of $8.90 a share from FactSet has fallen 15% in the past three months.

JPMorgan’s first-quarter results released Wednesday morning showed the effects of a sharp slowdown in equity underwritings globally, with investment banking revenue down 28% year-over-year. The bank’s trading revenue held up better, with bond trading down 1% and equity trading off 7%. JP Morgan shares were down 2.6%, to $126 in early trading Wednesday.

“The big conversation coming into this year is what does Goldman’s normalized earnings look like,” says Devin Ryan, an analyst at JMP Securities, a unit of Citizens Financial Group.

“We think the company will make around $9 a share in the first quarter, not far off from a $40 a share annual run rate. We think the market will be pleased with $40 of earnings in this environment.”

Ryan has an Outperform rating and $460 price target on Goldman shares. There could be a relief rally in the stock Thursday if the company reports something close to $9 a share in first-quarter profits.

Goldman is exposed to global equity underwriting, which was down sharply in the quarter, but it has tended to do well in volatile trading environments. It’s a major commodities trader and could have capitalized on increased activity and big swings in energy, metals, and agricultural markets.

Ryan thinks the first quarter may showcase the underappreciated diversity of Goldman’s business. The firm has built out a consumer banking platform and has beefed up its investment management arm by attracting significant inflows of alternative assets.

The risk/reward ratio looks favorable for Goldman at current levels: The stock is trading just above book value. Barron’s identified Goldman as a top stock pick for 2021, and was bullish again on the stock in an article in late January.

Book value could approach the current stock price by the end of 2022. Book value has often been a floor for Goldman.

Goldman earned a 23% return on equity in 2021 and its current target is 13% rising to 14% to 16% over the next few years. If Goldman can earn a 13% return on book value this year, its earnings should be close to $40 a share.

One area to watch in Goldman’s first-quarter report is revenue from its $19 billion portfolio of public and private-equity investments. That portfolio generated an enormous $9.2 billion of 2021 revenue, reflecting gains and higher valuations, entirely on the private side which accounts for $14 billion of the portfolio.

With equity valuations lower in the first quarter, that area could be a source of reduced earnings, although Ryan thinks the private investments have been conservatively marked. Goldman doesn’t provide many specifics of that portfolio but the largest areas are technology, media, and telecom (TMT), and real estate, which together make up about half the portfolio.

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