Goldman Sachs Highest Book Value Premium Since December 2017
Goldman Sachs (GS) won’t release financial results for three weeks, but the stock has had a monster run since November 2020, rising from just under $200 per share to its current price near $390-$400 per share. action.
Fed liquidity and fiscal stimulus triggered to fight the pandemic led to a substantial increase in EPS and Goldman’s revenue.
Here are the banking giant’s last 6 years of annual EPS and revenue growth:
|Annual EPS||Annual Rev ($’s bl’s)|
|2021 – East||$59.85||$58.6 billion|
Source: Goldman earnings valuation spreadsheet
What’s amazing to me is that Goldman’s EPS growth with one quarter to report in Calendar 21 is expected to increase 92% this year on projected revenue growth of 32%.
Valuation price/book value:
The stock is cheap on a PE basis, but brokerage stocks generally trade that way. It is the evaluation of the book course that holds my attention today:
Source: Assessment Spreadsheet
As readers can see, Goldman is trading today at its highest premium to book value in the past 4-5 years.
The big question though is, “What is normalized or stabilized EPS?” for the bank over a horizon of 3 to 5 years, without massive liquidity from the Fed and Congress?
If I told you that I know the answer to that question, it would be a complete guess: I would say it’s probably over $30 and under $60 (in annualized EPS) for Goldman assuming normal capital markets.
Between 2007 when Goldman made $24 and change and 2018 when Goldman made $25 and change, the minimum was $4 in EPS in 2011, so it’s quite a range.
Readers can see the difficulty of valuing a brokerage stock using EPS given the volatility and since I’ve been doing this (modeling and tracking brokers) since the early 1990s the sell side has never made a good job estimating EPS.
Summary / Conclusion:
Goldman’s expected decline in EPS and revenue in 2022, as it stands today, should probably be taken with a grain of salt, since last year at this time (i.e. in December 2020), the Street expected Goldman’s revenue to drop 9-10%. , to see it grow by 32%.
That’s the catch for 2022; how much will an aggressive Fed slow the financial cycle and what impact will this have on ultra-sensitive investment banks and brokers?
Some might think that a premium of 1.5 times book value isn’t really a premium, which is why I’ve attached the spreadsheet above. You can wait to see if the stock hits 2x the pound, but already quarterly EPS in dollars and Goldman’s earnings are starting to slow:
|Q4 21 – sell-side consensus||$11.73||$12.0|
|Q1 ’20||$3.11||$8.7 billion|
Source: evaluation spreadsheet
Readers can see how Goldman’s results peaked with the first quarter of 2021 (which by the way will be hard to compare in 22), so what is Goldman’s “new normal” i.e. $10 per share per quarter?
Goldman was bought for clients in the summer of 2020 when banking and financial stocks were trading like dead money (Goldman was bought between $200 and $210 per share), but it was sold too early, between $280 and $290 on January 21.
The goal is to wait for a better entry point for now.