Goldman Sachs: An Easier Fed Can Unleash A Lot Of Earnings Power
Contributor since 2012 / 10010 Followers
Summary:
- Going through Goldman Sachs numbers today finds the stock reasonably valued as it’s preparing to trade above its August ’21 all-time-high of $420.
- For 2024, Goldman is expecting to earn $37.57 in EPS (as of April 22nd’s estimates), which is an expected YoY growth rate of 65%, after 2 years of EPS declining 49% and 24% respectively.
- One catalyst so far in 2024 has been the corporate high-grade and high-yield bond issuance, which set a new record in Q1 ’24.
Dan Totilca
Just getting around to finishing the review of the financial sector names that are followed, going through Goldman Sachs (NYSE:GS) numbers today finds the stock reasonably valued as it’s preparing to trade above its August ’21 all-time-high of $420.
Goldman is not the same Goldman that investors knew in the late 1990s (GS didn’t go public until June 1999, or within 9 months of March 2000 bull market peak), but it still has plenty of earnings power when the financial system liquidity is right.
From 2019 through 2021, Goldman’s EPS rose from $21 in EPS in 2019, to $59.36 by the end of 2021. Obviously, the SPAC IPO explosion, bitcoin and crypto, and the Fed cutting interest rates to zero, greatly helped Goldman nearly triple its EPS in the course of 24 months.
For 2024, Goldman is expecting to earn $37.57 in EPS (as of April 22nd’s estimates), which is an expected YoY growth rate of 65%, after 2 years of EPS declining 49% and 24% respectively.
One catalyst so far in 2024 has been the corporate high-grade and high-yield bond issuance, which set a new record in Q1 ’24. The IPO market has stirred a little in ’24 as Goldman, Morgan Stanley (MS) and JPMorgan (JPM) were bankers on the Reddit (RDDT) deal, but I suspect after the 2-year drought in ’22 and ’23, there is a bigger IPO pipeline in waiting, most likely waiting on lower rates.
Trading at an 11x PE, at $415 per share, for a stock expected to grow EPS in ’24 by 65%, on 12% revenue growth, is a reasonable valuation. Price-to-book value on GS is 1.3x and price to tangible-book is 1.4x as of tonight’s close.
Goldman buys back anywhere from $1 to $2 billion in common stock per quarter.
Summary/conclusion: Since the big bank stocks reported on April 12th, 2024, the financial sector has been trading with a nice bid as the S&P 500, Nasdaq and the general equity market have been selling off.
Is this an early interest rate tell? It’s worth a separate article, but financials might be telling us that the Fed is closer to fed funds rate reductions than we suspect.
JPMorgan, Schwab (SCHW), Citigroup (C), American Express (AXP), (no positions), even Berkshire Hathaway Class B shares (BRK.B) bounced back quickly after the recent drop, and now Goldman and Morgan Stanley are following in kind.
What I like about Goldman is that it’s just now closing the gap with the August ’21 all-time-high, even though the S&P 500 made a new all-time-high above the early 2022 print of 4,815, during later in January ’24.
The laggards are catching up.
After finishing the valuation spreadsheet today, this blog added more GS for client accounts and will continue to do so. As was noted in the earnings summaries of JPMorgan and Citigroup, the banking system looks to be in very good shape, from a net interest income (NII) perspective, and a credit (i.e. loss) perspective.
I’ll leave readers with a monthly chart of GS, which shows the stock not even close to being overbought.
None of this is advice or a recommendation. Past performance is no guarantee of future results. Investing can involve the loss of principal, even for short periods of time.
Thanks for reading.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.