The lobby of the Goldman Sachs headquarters building in lower Manhattan. Goldman had a strong 2021, although trading slowed in the fourth quarter.
Victor J. Blue/Bloomberg
Goldman Sachs Group is coming off a blockbuster year when it earned $21 billion—more than double that of prepandemic 2019.
Investors aren’t in a celebratory mood. This past week, Goldman shares (ticker: GS) fell 10%, leaving them 19% below their November high, after fourth-quarter earnings of $10.81 a share fell short of expectations for the first time in seven quarters.
The selloff provides an opportunity to invest in Wall Street’s most prestigious investment bank and trading house at an attractive price. Goldman was a Barron’s top stock pick for 2021, when it returned 47.6%, and it looks poised for another strong year.
The stock, at a recent $345, trades for under nine times projected 2022 earnings of about $40 a share and for just 1.2 times its year-end 2021 book value of $284 a share. That is a sharp discount to rivals Morgan Stanley (MS) and JPMorgan Chase (JPM), which fetch around 13 times projected 2022 earnings and nearly twice book value, despite similar returns on equity in the fourth quarter.
Like those Wall Street giants, Goldman has reaped rich profits from trading on bonds, currencies, commodities, and equities. Yet Goldman is more reliant on such trading and on investment banking than its peers. That can make its profits more volatile and harder to predict.
Street Savvy
Here’s how Goldman Sachs measures up against its banking peers.
| Company / Ticker | Recent Price | Market Value (bil) | 52-Wk Change | 2021 EPS | 2022E EPS | 2022E P/E | Price / Book Ratio | Dividend Yield |
|---|---|---|---|---|---|---|---|---|
| Goldman Sachs Group / GS | $348.10 | $121.6 | 19.8% | $59.45 | $40.31 | 8.6 | 1.2 | 2.3% |
| Bank of America / BAC | 45.75 | 369.6 | 41.5 | 3.44 | 3.21 | 14.3 | 1.5 | 1.8 |
| Citigroup / C | 64.46 | 127.9 | 1.9 | 7.67 | 8.17 | 8.4 | 0.7 | 3.2 |
| JPMorgan Chase / JPM | 147.66 | 436.4 | 8.6 | 15.36 | 11.40 | 13.0 | 1.7 | 2.7 |
| Morgan Stanley / MS | 99.83 | 176.9 | 33.4 | 8.01 | 7.67 | 13.0 | 1.8 | 2.8 |
| Wells Fargo / WFC | 55.00 | 213.7 | 69.4 | 4.95 | 3.87 | 14.2 | 1.3 | 1.5 |
E=estimate
Sources: Bloomberg; company reports
Even with a return to more normal, if less lucrative, markets, “Goldman’s earnings should be dramatically higher than where the firm was entering the pandemic,” says Devin Ryan, an analyst at JMP Securities. He has an Outperform rating and a $460 price target on the stock.
Ryan says the firm is getting virtually no credit for some of its newer businesses, notably the digital consumer-banking franchise Marcus, which has more than $100 billion in deposits, 10 million customers, and $1.5 billion in 2021 revenue. Goldman doesn’t disclose profits for its consumer bank. But public digital banks trade for a multiple of revenue, meaning that the Goldman platform could be worth $10 billion or more.
The firm also has a fast-growing business of managing alternative assets, including private equity, for clients. Its asset management business, with $2.5 trillion under supervision across a variety of platforms, could be worth $30 billion or more, or a quarter of the firm’s market value.
Those businesses go a long way toward Goldman’s goal of diversifying its revenue base.
Investors still have some issues. Despite a growing consumer business, Goldman isn’t a play on rising interest rates, as it is with other banks.
Another issue is that Goldman’s expenses are up sharply, particularly compensation, which rose 33% last year, to $17.7 billion. Investors worry that the firm is having to pay up to attract talent and retain it.
Goldman plays down the concerns.
“Our pay-for-performance philosophy means compensation is variable in both directions,” Denis Coleman, Goldman’s chief financial officer, tells Barron’s. “If this year is different from 2021, we can take it down.”
Goldman’s book value could top $310 a share by the end of 2022, meaning that the stock trades for 1.1 times forward book value. That suggests little downside. The book value has only about 5% in intangible assets. And the firm takes an old-fashioned view that steadily expanding book value is an important corporate goal.
Given its valuable capital-light businesses, such as investment banking and asset management, Goldman is likely worth considerably more than book value. Earnings of $40 a share during 2022 would be very respectable—nearly double 2019 levels—and translate into a solid return on equity of about 14%. Goldman earned a record $59.45 a share in 2021.
Its shares now yield 2.3% after the firm raised its dividend 60% in 2021. Another dividend increase is a good bet in 2022.
Goldman is due to update investors in February on its strategic initiatives rolled out in early 2020. So far, it has delivered on its three main goals of expanding and strengthening existing franchises, diversifying its business mix, and boosting what had been mediocre returns. Investors will be eager to see if Goldman raises its targeted return on equity, now a floor of 13%.
Goldman’s Coleman says: “We have a top-five asset manager as part of Goldman Sachs. We have a consumer digital bank with differentiated products in growth mode inside Goldman Sachs. We have a leading investment bank inside Goldman Sachs and a leading sales and trading business.”
The sum of those parts is probably worth much more than Goldman’s current market value of $120 billion. Its franchise keeps getting stronger.
Write to Andrew Bary at [email protected]
