Goldman Sachs (GS) is an international financial institution that offers a wide range of financial services across investment banking, securities, investment management, and consumer banking to a large and diversified client base globally. This client base comprises corporations, financial institutions, governments, and individuals.
Goldman Sachs is a highly-profitable business, which I expect to continue delivering robust shareholder returns going forward. The stock is reasonably valued, pays a solid dividend, while management has also been executing quite beneficial stock repurchases over the years.
However, investors should be wary of Goldman’s inflated profitability recently, which may not be sustainable going forward. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)
Recent Results
Goldman Sachs’s Q3-2021 results came in very strong, with revenues growing 26% year-over-year to $13.6 billion. Earnings per share were $14.93, beating analyst estimates by a massive margin of almost $5. While EPS was rather flat quarter-over-quarter, it grew 54.2% versus the comparable period last year.
Specifically, Goldman’s net interest income landed at $1.56 billion, a significant increase from $1.08 billion in Q3 2020, while non-interest revenue was $12 billion, 23.7% higher year-over-year.
Goldman’s Wealth Management segment also performed greatly, delivering revenue growth of 35% to $2 billion, which marked a new record for the company. Profitability during the quarter was assisted by operating expenses declining by 24% sequentially to $6.6 billion.
That said, operating expenses grew 6.2% year-over-year, driven by higher technology costs, professional fees, and market development expenses. Still, a small increase compared to revenue growth, which led to net income margins expansion.
Based on the company’s performance so far this year and analysts’ estimates, Goldman Sachs should end the year with EPS landing close to $60, implying a massive 80% growth compared to Fiscal Year 2020.
However, Goldman’s strong growth has been driven by the ongoing euphoria in the markets powered by an excess supply of cash and humble interest rates. Hence, investors should be wary regarding the sustainability of such high EPS levels in the medium term.
Capital Returns and Valuation
Goldman Sachs has hiked its dividend per share every year over the past ten years. The company’s most recent DPS increase was by a substantial 60%, following the company’s expanded bottom line. The stock’s yield of around 2% is a welcome supplementary capital return in the current low-yield environment.
However, most of Goldman’s capital returns have historically been delivered through stock buybacks. The company has reduced its share count by around 37.5% during the past decade, which has assisted significantly in EPS growth. I expect the company to continue buying back stock aggressively at its current valuation levels.
Based on EPS of around $60 for the year, the stock’s P/E stands at around 6.4, which of course, sounds quite attractive. That said, this multiple also suggests that investors anticipate a reduction in EPS next year. Nonetheless, the company could still be attractively valued even if EPS were to decline by up to 35% next year.
Wall Street’s Take
Turning to Wall Street, Goldman Sachs has a Strong Buy consensus rating, based on 11 Buys and three Holds assigned in the past three months. At $467.92, Goldman Sachs’ stock prediction implies 21.4% upside potential.
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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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