Does Goldman’s Stock Have More Room To Grow?

by Trefis Team
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Goldman Sachs
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Goldman Sachs’ (NYSE: GS) stock rallied almost 40% in 2019, with the company’s share price averaging just above $221 for the year. Despite this strong run, we believe that the premier investment bank’s stock still has some growth potential. Trefis details the key components of Goldman Sachs’ valuation in an interactive dashboard, along with our forecast for full-year 2020. We estimate the fair value of Goldman Sachs’ stock to be $254 per share – roughly 5% higher than the current market price. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current fiscal year.

Fiscal Q4 2019 Earnings Recap

  • For Q4 2019, Goldman Sachs exceeded revenue expectations, although it missed the consensus earnings estimate primarily due to a $1.1-billion litigation charge.
  • Total revenues grew 23% y-o-y to $9.96 billion in Q4 2019 thanks to a 75% jump in market making revenues driven by a 63% increase in FICC (Fixed Income, Currency & Commodity) trading and an 82% growth in other principal transactions.
  • However, the positive impact of a strong trading performance on the top line was partially offset by lower investment banking fees and commissions.
  • Further, operating expenses jumped by 42% y-o-y due to a 64% increase in Compensation & Benefit costs.
  • Overall, Goldman Sachs reported marginally lower revenues for full-year 2019 compared to 2018.
  • Although the bank is a market leader in the investment banking space, it witnessed negative growth in the segment, with revenues decreasing by almost $1.06 billion for the year.
  • This was due to challenging economic conditions led by the U.S.-China trade war, Brexit, and the impact of negative bond yields.
  • That said, the bank was able to offset the negative impact of the lower Investment banking revenues to a large extent, as its trading desks did exceptionally well in the last quarter.
  • Going forward, we expect investment management and investment banking segments to drive revenues over the coming years, although macroeconomic headwinds could potentially hamper its growth.

 

We arrive at the stock price estimate for Goldman Sachs as:

Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio

Growth In Investment Management Business Would Drive Goldman Sachs’ Revenues For Full-Year 2020

  • Total Revenues have increased by 19% from $30.6 billion in 2016 to $36.5 billion in 2019, and are expected to grow by 1% to $36.8 Billion in 2020
  • This would be driven by a 15% jump in the Investment Management segment coupled with an 8% growth in Investment Banking revenues, partially offset by a 9% decline in revenues from Institutional Client Services.
  • Investment Banking would benefit from higher consumer activity in the M&A space, followed by growth in the number of debt origination deals thanks to the improvement in bond yields in the fourth quarter of 2019.
  • On the other hand, the expected decrease in institutional client services would mainly be driven by a 15% drop in FICC trading (Fixed income, currency & commodity) revenues coupled with a slight decline in equity trading.

Our interactive dashboard analysis, ‘Goldman Sachs revenues: How Does Goldman Sachs Make Money?’ provides an in-depth view of the company’s revenues.

 

Higher Operating Margin Would Drive The Net Income Figure

  • Goldman is expected to report a Net Income of $8.7 billion in 2020, which is 10% more than the previous year.
  • The operating margin is expected to increase by 284 bps in 2020 as compared to the previous year, due to a drop in expenses by 3%.
  • This would improve the adjusted net income margin by 196 bps from 21.6% in 2019 to 23.6% by 2020.

 

This Lends Support To A $254 Price Estimate For Goldman Sachs’ Shares

  • Goldman Sachs has regularly invested in share repurchases to boost shareholder returns. Its share repurchase program is likely to touch $5.4 billion for the full year 2020.
  • Higher adjusted net income coupled with a steady decline in share count, should result in Goldman Sachs’ EPS figure increasing to $24.60 in 2020.
  • Using a 10.3x P/E Multiple on expected 2020 EPS of $24.60, this works out to our price estimate of $254 for Goldman Sachs’ Stock.

Our interactive dashboard – ‘Goldman Sachs Valuation: Expensive or Cheap?’ provides details about how Goldman Sachs’ P/E multiple compares with peers JPMorgan, Bank of America, and Citigroup.

 

See all Trefis Price Estimates and Download Trefis Data here

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