Goldman’s Money-Minting Days Are Over

by Dan Burrows | October 3, 2012 11:24 am

Forget the sullied reputation, the Senate hearings, being called a “Vampire Squid” or the fact that its stock is 50% below its 2007 peak. Goldman Sachs (NYSE:GS[1]), Wall Street’s most powerful investment bank, is back to getting love from the media.

Last summer, we thought we saw some long-term value in the shares[2]. Based on valuation alone, Goldman Sachs looked like a decent bargain bet for long-term value investors capable of sticking it out through bouts of extreme volatility.

But now Barron’s is saying Goldman Sachs could rally 25%[3] in the next year or so, and that seems a tad overoptimistic.

Sure, GS trades below book value, but then all banks are trading below book value. Meanwhile, by forward earnings, the stock is in line with its own five-year average, according to data from Thomson Reuters Stock Reports. No, Goldman Sachs doesn’t appear overpriced, but then it’s by no means on sale, either.

Analysts’ average and median price target stands at $128. Add in the 1.6% forward yield on the dividend, and you get an implied upside of 10.5% in the next 12 months or so. Not bad — but also not a screaming buy.

And as the stock closes in on that price target, Goldman Sachs will be at risk of Wall Street downgrades based solely on valuation.

Meanwhile, in an uncommon state of affairs for the usually bullish analyst community — where slapping buy calls on stocks is the rule, not the exception — hold recommendations outnumber buys. Of the 29 analysts covering GS, 18 say hold versus 11 buys, according to Thomson Reuters data.

True, as we noted after second-quarter earnings, Goldman Sachs has eclipsed analysts’ average bottom-line estimate for three consecutive quarters after missing for two periods in a row. The firm also has topped the Street’s top-line forecast for two straight quarters, following a string of three straight misses.

But that doesn’t mean it’s business as usual for the investment bank. Goldman is beating some very low expectations, after all, and profit and revenue are in decline. For the most recent quarter, income fell 11% on a 9% slide in net revenue.

The cold, hard fact remains that Goldman Sachs doesn’t mint money like it used to. Net income peaked at $13.39 billion in fiscal 2009. Through the trailing 12 months ended June 30, net income came to $3.69 billion. GS is forecast to hit $5.8 billion for the current fiscal year — or 57% lower than its 2009 peak.

Blame the usual suspects: A dearth of deal activity means Goldman garners less business from advising on mergers and acquisitions. The same goes for the precipitous drop in initial public offerings.

And it’s tougher to make money trading your own book, especially given the brave if boring new world of impending financial regulations like Dodd-Frank and the bigger capital cushions required. No more excessive leverage to juice returns. At the same time, banks are forced to keep more cash in reserves — which is just sitting around earning nothing.

Sure, Goldman Sachs could rally 25% in the next 12 months or so — but the Street sure isn’t expecting it. The capital markets would have to greatly improve, for one thing, and with Europe in recession and the U.S. at stall speed, that’s hardly a slam dunk.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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  2. long-term value in the shares:
  3. Goldman Sachs could rally 25%:

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