The Dow Jones Industrial Index is one of the best-known indexes in the world, yet many investors have not taken closer looks at all of its constituents. We believe that several of the thirty Dow Jones stocks are attractive right here, including Goldman Sachs (GS).
As a leading investment bank Goldman Sachs is impacted by troubles in international trade and global equity markets. On top of that the company came under pressure due to the 1MDB scandal in Indonesia. Despite these headwinds, Goldman Sachs looks like a strong long-term investment at current prices, as the stock has a good chance of delivering mid-teen total returns over the coming five years.
Goldman Sachs is one of the leading financial corporations in the world, combining services such as investment banking and investment management, and operating globally, with diverse customers. Goldman Sachs operates in four segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
It is not a primary competitor of money center banks such as Wells Fargo or Bank of America, instead being more weighted toward investment banking and related businesses, where it competes with Morgan Stanley. Goldman Sachs was founded in 1869, thus its history dates back 150 years. The company is headquartered in New York, NY, and is currently trading with a valuation of $71 billion.
Recent Earnings Results And Growth Outlook
Goldman Sachs has announced its first quarter earnings results in April, which were considerably better than the results that the analyst community had expected.
Goldman Sachs managed to generated revenues of $8.8 billion during the quarter, which was 13% less than the revenues that Goldman Sachs has generated during the previous year’s quarter. An even larger decline was expected, though. Goldman Sachs remained the market leader in terms of completed mergers and acquisitions, and Goldman Sachs also held the leadership position in equity offerings. Goldman Sachs’ Institutional Client Group generated lower revenues compared to the previous year’s quarter, but that was not a surprise, as the first quarter of 2018 had been a quite active one, which led to a harsh comparison.
Source: Goldman Sachs presentation
Goldman Sachs generated earnings-per-share of $5.71 during the first quarter, on the back of solid net profits Goldman Sachs achieved a return on equity of more than 11%, while also growing its book value to $209, which is more than Goldman Sachs’ current share price.
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Over the last year Goldman Sachs’ stock performed relatively weak, which can be attributed to the macro factor of worries about the global economy, as well as to the scandal around 1MDB that is specific to Goldman Sachs. In the 1Malaysia Development Berhad scandal, then-Prime Minister Najib Razak was accused of embezzling $700 million with the help of Goldman Sachs. Goldman Sachs plans to discuss with the DoJ how to resolve its role in the corruption scandal in the near future, it could be required to plead guilty, while penalties are likely as well. This scandal will not break Goldman Sachs as a company, though, and it is likely that Goldman Sachs will recover from the fallout of this issue in the not-too-distant future.
In the meantime, Goldman Sachs was part of the group of banks that managed Uber’s huge IPO in May, which should be reflected in Goldman Sachs’ Q2 results. Goldman Sachs also acquired United Capital Financial in a $750 million deal in May, thereby boosting its wealth management business further.
Goldman Sachs will, we believe, be able to achieve a compelling earnings-per-share growth rate of 8% over the coming five years, driven by lenient regulation, which should lead to business growth and which leads to reduced compliance and legal expenses. On top of that, Goldman Sachs’ moves to expand its loans and savings business via its Marcus platform should drive revenues as well. Goldman Sachs has also reduced its share count by more than 20% over the last decade, and future share repurchases should allow the company to reduce its share count further, which will have a positive impact on its earnings-per-share growth rate.
Valuation, Dividend, And Total Return Outlook
Goldman Sachs’ shares have recently fallen below $200 again, and based on our forecast for this year’s earnings of $23.50 on a per-share basis, Goldman Sachs is valued at just 8.2 times 2019’s net profits right now. This is a quite low valuation in absolute terms, and it also represents an inexpensive valuation relative to how Goldman Sachs’ shares were valued in the past. We see upside potential towards a fair price to earnings multiple of 10.5, which would be more in line with Goldman Sachs’ historic valuation.
Assuming that the 10.5 times price to earnings multiple is reached in 5 years, multiple expansion could add about 5% to Goldman Sachs’ annual returns during that time frame. When we factor in Goldman Sachs’ forecasted earnings-per-share growth rate of 8% and its dividend, which currently yields 1.8%, we get to a forecasted annual total return of 14.8% over the coming five years, which we deem highly attractive.
Goldman Sachs has a leadership position in the markets that it serves, while also expanding non-core businesses such as its Marcus lending platform. Acquisitions, such as the takeover of United Capital Financial, boost Goldman Sachs’ growth outlook further. Due to paying out just a small amount of its net earnings in the form of dividends, Goldman Sachs has ample means to reduce its share count via stock buybacks. These are especially accretive when the stock trades at an inexpensive valuation, such as right now.
We believe that Goldman Sachs will be able to grow its earnings-per-share at an attractive pace over the coming years, while its dividend and multiple expansion potential result in further tailwinds for Goldman Sachs’ total returns over the coming years.
Downside risk for the stock seems low, as Goldman Sachs’ shares are very inexpensive already, and at the same time, the forecasted mid-teens total returns make Goldman Sachs a buy below $200.