When it comes to American financial institutions, few are held in such prestige as the venerable Goldman Sachs (GS - Free Goldman Stock Report). Founded in 1869 and headquartered in New York City, Goldman is a multinational investment banking firm that engages in investment management, securities, and other services primarily with institutional clients. The company provides asset management, mergers and acquisitions advice, prime brokerage and underwriting services to an impressive roster of clients that includes corporations, governments, and individuals. Still, some of that luster came off at the time of the 2008 financial crisis when GS was heavily involved in subprime mortgages and needed a bailout from the U.S. government to maintain operations. Since then, business has stabilized, but annual earnings and revenues remain substantially below all-time highs. Using the Value Line page, we take a look at the freshly minted April 15, 2016 report on Goldman Sachs and judge its current investment merits on a number of current metrics.
The first thing we will be looking at is the Recent Price located in the Graph at the top center of the page. GS is trading in the mid-$150s range. A quick glance just below that box to the High/Low line of prices tell us that the stock approached $180 earlier this year and traded as high as $250 before the aforementioned financial crisis took hold. This tell us that the shares have been on a downward trajectory of late, which enhances the 3- 5-year capital appreciation prospects here. A look at the Projections Box two spaces below the company name and we can see that our Target Price Range out to 2019-2021 calls for gains on the high end that could approximate 105% with the low end equating to gains of 55%. This average is significantly greater than the Value Line median. Therefore, GS is a solid play for appreciation to decade’s end.
So what is the reasoning behind the stock’s recent slide? Well, for starters, the company closed out 2015 in soft fashion. Net revenues trailed off a bit on a year-over-year basis. Too, Value Line analyst Adam J. Platt points out that “the banking segment was strong on M&A activity, but weakness on commodities and equities hurt operations’’. Add to this that on April 5th a number of brokerage houses slashed earnings estimates for the recently concluded first quarter of 2016. Looking at the Earnings Per Share Box on the lower left hand side of the page, it becomes evident that EPS will be down significantly in the March period versus 2015’s like showing. Mr. Platt’s call has been lowered to $3.50 a share. Such a dip would mark the poorest comparison for Goldman since the heart of the financial crisis at the start of 2008. Clearly, investors did not like this news and chose to cycle out of GS and into other financials or sectors with better near-term prospects. Our in-house outlook still leaves open the potential for earnings growth in 2016, but that window could close if results are worse than anticipated when Goldman Sachs releases first-quarter results at the open of business on April 19th.
But this is Goldman Sachs. Yes, a down period seems to have set in, however, there must be some silver lining, an area of expertise where operations are thriving. Thankfully, there is. Even as earnings expectations dip, revenues are on the rise. Our Quarterly Revenues Box is just above the Earnings Box and it shows that the top line has been right around $40 billion per annum for the last four full years. For 2016, though, we look for the needle to finally move in a positive direction and eclipse the $45 billion mark. Dealmaking appears to be a rising piece of the Goldman puzzle. During the first quarter, the firm ranked first in global M&A volume; it worked on eight of the top-10 pacts and 59 deals in total with a combined value of $220.5 billion. This level of involvement positions the company with a market share that borders the 30% range. So, investment banking is strong, but if you look at the Blurb in the middle of our page, which shows the revenue breakdown and other pertinent information (employee count, larger than 5% shareholders, insider ownership levels), you see that that entity only brings in about 20% of annual revenues. Institutional Client Services is more than double that. Here, the strong U.S. dollar has been a headwind. However, domestic broader market indices have been on a slow-but-steady incline in the past few week. We do not yet know if this was enough to rescue first-quarter results. Judging by recent investor sentiment we would lean toward an answer of no.
Now let’s take a look at the income component of this stock. We start by checking out the Quarterly Dividends Paid Box in the lower left-hand corner. It is also important to note the Dividend Yield notedat the top right side of the Top Label. This displays GS stock’s yield of 1.7%, which is noticeably below the Value Line median of 2.3%. Therefore, Goldman does not merit investment consideration on its dividend alone. But, when you combine the income component with the aforementioned capital appreciation potential out to 2019-2021, the total return aspect of these shares is appealing. With that, we find this blue-chip equity to be best suited for patient investors seeking long-term total return. There may be some bumps in the road near term, but GS is a high-quality holding that should reward shareholders over time.