Goldman Sachs Group Inc: Consider GS Stock for Its Cheap Valuation
GS Stock: An Attractive Valuation
This year is a very interesting and unique one for the markets. It seems that each month brings new trading highs in the broad indices. This is great for investors because it means there is more confidence in the market–and more capital being invested into it.
The downside to this is that there are fewer stocks trading at reasonable or undervalued valuations. In our weekly Income Investors analyst meeting, this was the top issue being discussed among us. One large-cap blue-chip company that was mentioned a few times was investment banking giant Goldman Sachs Group Inc (NYSE:GS). And when I later followed up by conducting my own personal research on GS stock, I found the investment looked very appealing. Here’s why.
A company’s value is based on its trading multiple. GS stock currently has a price-to-earnings (P/E) ratio of 11.6 times, or $11.60 per $1.00 of earnings. In contrast, the industry average P/E ratio is 22.1 times. Solely based on this, the stocks could be picked up at half the valuation of the entire group of stocks.
Goldman Sachs holds even more value when factoring in its price-to-book (P/B) ratio. This ratio is used to determine the value of a company if all its assets were sold and all liabilities were paid for. Compared to the current trading price, the ideal value would be close to even, because there would be no premium being paid for the company’s assets.
GS stock’s P/B ratio is 1.1 times, meaning it is trading at a 10% premium, which is pretty reasonable by today’s standards. The same could not be said for the overall industry, which has a ratio of 4.5 times, or a 450% premium. History shows that paying being overvalued leads to long-term poorer returns.
If GS stock had no future growth to look forward to, the discount valuation would make perfect sense. However, Goldman Sachs is growing and has future growth to look forward to. Therefore, the above metrics should be trading more in line with the industry.
When it comes to the future growth mentioned above, earnings are the most important number, provided on a quarterly basis by the company itself. The trend of earnings is particularly notable, as it shows how the company is being managed. The expectation, of course, is that earnings are rising, to the benefit of investors, as is the case with GS stock. Below is a table of the annual earnings per share (EPS) over the past two years. As you’ll see, annual EPS increased by 34% in only one year:
In only one year, the annual EPS increased by 34%.
Also, it is important to look at the projected estimated annual earnings. This will give insight into the company’s future outlook and what to expect going forward. At this time, there is a very bullish outlook on GS stock, given the trend of earnings is expected to continue to move higher as mentioned above. Below is a table with the relevant information:
|Year||Estimated Annual EPS|
Over the next two years, double-digit growth is still expected from earnings. This is possible because of Goldman Sachs’ current cost-cutting measures, leaving more on the company’s bottom line.
The positive outlook can in part be attributed to the Federal Reserve’s increases to the overnight benchmark interest rate, with four such hikes having occurred since 2015. The rate increases help to improve business margins due to causing increased demand for both saving and lending products and generate more trading revenue. And with the benchmark rate still near its historic lows, currently being at 1.25%, and the U.S. economy picking up steam in all sectors, more rate hikes could be on the way. (Source: “United States Fed Funds Rate,” Trading Economics, last accessed August 28, 2017.)
Final Thoughts About GS Stock
There are always investment opportunities available when the markets are trading at such high levels; the key is to just keep looking until you find them. Of course, high-quality companies with steady and predictable earnings are what you should be looking for, and as part of the Dow Jones Industrial Average, Goldman Sachs fits the bill.
The last reason to consider GS stock is its growing dividend. The current dividend yield is 1.4%, a percentage which has grown for five straight years. And with the earnings growth to look forward to, look for that growth streak to possibly go on for years to come.
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