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I last reviewed Goldman Sachs' (GS) in my January 19, 2022 post at which time I conclude GS's valuation to be attractive. I had to severely curtail my additional GS investment, however, because I require funds to cover tax obligations following the completion of our 2021 tax returns.
GS released Q1 2022 results on April 14, 2022. Despite my current inability to acquire additional shares, I now revisit it to determine if its valuation remains attractive.
Goldman Sachs - Business Overview
GS is comprised of the following 4 segments.
- Investment Banking
- Global Markets
- Asset Management
- Consumer and Wealth Management
In January 2020, GS laid out its 3-part strategic plan to produce higher and more consistent returns. This plan consists of the following:
- grow and strengthen existing businesses;
- diversify its products and services; and
- operate more efficiently.
GS is building a more resilient, diversified franchise that can generate solid returns even in more uncertain markets. It is actively working to lower its Stress Capital Buffer (SCB) by reducing the value of capital charges stemming from equity exposures in its asset management business; GS has been saddled with the highest SCB among the eight US global systemically important banks.
GS currently awaits a response from the Federal Reserve to its Comprehensive Capital Analysis and Review (CCAR) submission; the CCAR is a stress-test regime for large US banks that aims to establish whether lenders have enough capital to cope with a severe economic shock and that assesses their risk modelling practices.
An excellent overview of each segment and a recap of GS's 3-part strategic plan are provided in the Chairman and Chief Executive Officer's Letter to Shareholders.
An investor desiring to learn about GS should read Part 1 of the 2021 Form 10-K.
Acquisitions
The purpose of GS's acquisitions is to accelerate the drive for more durable returns.
NN Investment Partners
On August 19, 2021, GS announced the proposed acquisition of NN Investment Partners for €1.7 billion. NN Investment Partners is a leading European asset manager based in The Hague, Netherlands, with ~$355B in assets under supervision and ~$70B in assets under advice; this acquisition closed on April 11, 2022.
GreenSky
On September 15, 2021, GS announced it had entered into a definitive agreement to acquire GreenSky, the largest fintech platform for home improvement consumer loan originations. This all-stock transaction valued at ~$2.24B closed on March 29, 2022.
NextCapital Group
On March 29, 2022, GS announced the proposed acquisition of NextCapital Group Inc., a Chicago-based robo-adviser that provides automated advice and digital tools to corporate retirement plan participants. This transaction, expected to close in the second half of FY2022, will accelerate the expansion of GS's services to the growing defined contribution market through personalized managed accounts and digital advice.
NextCapital’s platform is expected to become part of GS's Asset Management’s multi-asset solutions business. GS's overall asset management unit already supervises a total of ~$350B in assets in defined-benefit and defined-contribution accounts. Terms of the deal have not been disclosed but GS confirms it is one of the five most expensive purchases for the asset management unit to date.
Goldman Sachs - Financials
In this brief video, GS's Global Head of Investor Relations shares the topics being discussed with investors, including the continued strength and diversity of the firm's client franchise and progress in driving the durability of earnings.
The following are extracted from GS's Q1 2022 Form 8-K.
GS's Net Revenues of ~$12.93B in Q1 2022 (~$52B on an annualized basis) do not look out of line with FY2021 - 2021 top-line results (in billions of $): 32, 32, 32, 31, 28, 30, 36, 37, 45, and 59.
Within this $52B, however, are some substantial movements in individual revenue lines as borne out by the following variances between Q1 2022 and Q4 2021 results:
- total revenue increased 2%;
- investment banking revenue decreased 36%;
- global markets or trading revenue increased 98%;
- asset management revenue decreased 81%; and
- consumer and wealth management revenue increased 7%.
The evolving market backdrop led to significant headwinds with GS's equity capital markets issuance volumes being lacklustre. Global Markets, however, had a strong quarter because the challenging environment allowed GS to support clients in the risk intermediation and financing needs.
GS closed over 115 deals for ~$385B in Q1 and maintained its #1 league table position with ~$360B in announced transactions. This was ~$155B ahead of GS's next closest competitor and it marked the largest quarterly lead in GS's history as a public firm.
Equity underwriting net revenues were substantially below the firm's record performance in Q1 2021. Despite this, GS continues to rank #1 YTD in equity and equity-related offerings with a volume market share of 8%.
Net revenues for equity investments were ($0.36B). GS's public and private portfolios experienced substantial losses tied to Russia-related positions with all positions having been written down to $0.
GS harvested ~$1B of on-balance sheet equity investments in Q1. Management remains committed to reducing this portfolio over time and anticipates another $1B of incremental private asset sales corresponding to ~$0.75B of capital reduction.
GS's provision for credit losses was ~$0.561B, up from ~$0.344B in Q4. The increase was primarily due to the growth in the lending portfolio as well as broader macroeconomic factors, including a slowing growth outlook.
Total quarterly operating expenses were ~$7.7B, down from ~$9.437 in Q1 2021.
The Q1 non-compensation expenses were ~$3.6B, 7% higher YoY. This increase was driven by GS's continued investments, particularly in technology, that will further enhance the firm's infrastructure and support strategic growth initiatives.
Russia / Ukraine Exposure
The overall direct financial impact from Russia and Ukraine-related instruments on Q1 revenues was a net loss of ~$0.3B.
GS is currently in the process of winding down its limited Russian operations.
Goldman Sachs - Credit Ratings
I look at a company's senior unsecured long-term debt and rating outlook to gauge the degree of risk I am assuming as a shareholder.
Ratings for GS and a number of its affiliates as of March 2, 2022 are accessible here.
The long-term debt ratings assigned to Goldman Sachs Group, Inc. are those of interest to me as this is the entity in which I have invested.
- Moody's assigns an A2 rating with a stable outlook.
- S&P Global assigns a BBB+ rating with a stable outlook.
- Fitch assigns an A rating with a stable outlook.
The Moody's and Fitch ratings are the middle tier of the upper-medium grade investment-grade category. The rating assigned by S&P is two notches lower at the top tier of the lower-medium grade investment-grade category.
Moody's and Fitch define GS as having a STRONG capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
S&P Global defines GS as having an ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
Despite the variance in ratings, all 3 ratings are satisfactory for my purposes.
Dividend and Dividend Yield
GS does not maintain a dividend history on its website but this history is accessible here.
On April 13, 2022, GS's Board declared a dividend of $2.00/common share to be paid on June 29, 2022 to common shareholders of record on June 1, 2022.
In FY2021, GS distributed $2.9B of dividends and in Q1 2022 it distributed $0.711B.
Prioritizing dividend income and dividend yield metrics can lead to flawed investment decisions. Investors would be better served by focusing on an investment's TOTAL potential return.
Since March 2000, GS's Board has approved a repurchase program authorizing repurchases of up to 605 million common shares; it has no set expiration or termination date. The repurchase program is effected primarily through regular open-market purchases. The amounts and timing of these repurchases are determined primarily by GS's current and projected capital position, but may also be influenced by general market conditions and the prevailing price and trading volumes of GS's common stock.
In FY2021, repurchased $5.20B of common shares. In Q1 2022, it repurchased $0.5B of common shares (1.4 million shares at an average cost of $363.53).
GS has been a prolific buyer of its issued and outstanding shares over the years with the FY2009 - FY2021 weighted average number of diluted shares outstanding (in millions) being 550.9, 585.3, 556.9, 516.1, 499.6, 473.2, 458.6, 435.1, 409.1, 390.2, 375.5, 360.3, and 355.8 (355.9 in Q1 2022).
Goldman Sachs - Valuation
At the time of my July 28, 2021 post, GS was trading at ~$375 and in the first half of FY2021, it had generated $33.64 in diluted EPS. Management does not provide guidance so using the forward-adjusted diluted PE guidance available from the 2 discount brokerage trading platforms I use, I arrived at the following:
- FY2021: 22 brokers, mean estimate $53.14, low/high range $48.39 - $60. Valuation using the mean estimate is ~7 and ~6.25 using the high end of the range.
- FY2022: 22 brokers, mean estimate $37.31, low/high range $32.98 - $41.50. Valuation using the mean estimate is ~10 and ~9 using the high end of the range.
- FY2023: 11 brokers, mean estimate $39.53, low/high range $34.37 - $43.70. Valuation using the mean estimate is ~9.5 and ~8.6 using the high end of the range.
When I wrote my October 15, 2021 post, GS had just released Q3 and YTD2021 results. Based on a ~$400 share price and adjusted diluted earnings estimates, GS's adjusted diluted PE levels were:
- FY2021: 28 brokers, mean estimate $53.59, low/high range $48.66 - $58.63. Valuation using the mean estimate is ~7.46 and ~6.82 using the high end of the range.
- FY2022: 28 brokers, mean estimate $38.04, low/high range $32.98 - $43.82. Valuation using the mean estimate is ~10.5 and ~9.1 using the high end of the range.
- FY2023: 15 brokers, mean estimate $40.79, low/high range $34.37 - $46.05. Valuation using the mean estimate is ~9.8 and ~8.7 using the high end of the range.
My valuation calculations when I wrote my January 19, 2022 post were based on a ~$347.50 share price and the following adjusted diluted earnings estimates:
- FY2022: 26 brokers, mean estimate $40.52, low/high range $34.58 - $45. Valuation using the mean estimate is ~8.6.
- FY2023: 24 brokers, mean estimate $42.23, low/high range $37.65 - $48. Valuation using the mean estimate is ~8.2.
GS is now trading at ~$321.60. With Q1 2022 results having just been released, I envision adjusted diluted earnings estimates will be revised over the coming days. Until this happens, GS's valuation is:
- FY2022: 27 brokers, mean estimate $37.92, low/high range $31.04 - $44.68. Valuation using the mean estimate is ~8.5.
- FY2023: 28 brokers, mean estimate $40.48, low/high range $34 - $45.30. Valuation using the mean estimate is ~8.
- FY2024: 14 brokers, mean estimate $43.88, low/high range $34.71 - $50.17. Valuation using the mean estimate is ~7.3.
Goldman Sachs - Final Thoughts
I initiated a GS position on November 19 2018 for ~$200.15. In 2021, however, I had to transfer GS shares to another investment account for tax planning purposes. This triggered a capital gain and resulted in a new average cost of ~$340.
At the end of March 2022, one of the 'Side' accounts in the FFJ Portfolio held 180 GS shares. It was not a top 30 holding when I completed my early January 2022 investment portfolio review but I do want to increase my GS exposure.
GS's valuation remains attractive. I am not currently in a position to acquire additional shares, however, for the reason noted at the outset of this post. Nevertheless, investors with funds availability and a long-term investment time horizon who can tolerate volatility (see the variances in Q1 2022 and Q4 2021 results reflected above) may want to consider a GS investment.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long GS.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
