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3 Reasons to Keep Goldman in Your Radar Beyond a 24.5% YTD Rise
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Shares of The Goldman Sachs Group, Inc. (GS - Free Report) have witnessed strong growth, with its stock surging 24.5% year-to-date compared with the industry's growth of 12.2%.
This stock is also trading slightly below its peers — JPMorgan & Chase (JPM - Free Report) and Morgan Stanley (MS - Free Report) . JPM rose 24% while MS moved up 7% in the said time frame.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Let’s discuss the factors that will keep driving Goldman's growth further.
Goldman’s Refocus on Wallstreet Operations to Drive Growth
GS decided to refocus on its core strengths of IB and trading operations while scaling back its consumer banking footprint.
In first-quarter 2024, the company completed the sale of GreenSky, its home-improvement lending platform. In fourth-quarter 2023, it sold its Personal Financial Management unit.
Goldman aims to cease unsecured loan offerings to consumers through its digital consumer banking platform — Marcus. In 2023, it sold substantially all of Marcus’s loan portfolio. Apart from these divestitures, the company is set to finalize an agreement to transfer its General Motors credit card business to Barclays (BCS - Free Report) . The companies are still in the final stages of negotiation.
With these initiatives, the corporation is focusing on investments, banking and other market-related activities.
GS’ focus on its Wall Street operations is paying off. In 2022 and 2023, its IB revenues declined 47.9% and 15.5%, respectively, while in the first half of 2024, the metric soared nearly 27% from first-half 2023. The upside was driven by the bounce back in global mergers and acquisitions (M&As), which led to a remarkable improvement in the industry-wide deal value and volume.
At a recently-concluded Barclays conference, CEO David Solomon stated that IB continues to improve, even though activity from financial sponsors has not rebounded as much as expected. Solomon stated that the firm is hopeful that private equity-led deals will bounce back at the end of this year and in 2025.
The company maintains its long-standing #1 rank in announced and completed M&As and ranked #2 in equity underwriting. A solid financial performance of the corporates, buoyant equity markets and expected rate cuts this year, along with Goldman’s leadership position, lent it an edge over its peers.
Goldman to Benefit as Fed Lowers its SCB Requirement
GS came out as a winner after challenging the Federal Reserve to reduce its capital requirements over its June annual stress test result, which initially forced this Wall Street investment bank to hold a higher amount of capital.
The central bank lowered the extra capital level requirement of Goldman Sachs. The bank now must hold a ‘stress capital buffer’ of 6.2%, down from the 6.4% suggested initially in the test.
With this, GS will be required to hold common equity equal to 13.7% of its risk-weighted assets (RWA) instead of the 13.9% the Fed initially advised.
As GS’ capital requirement lowers, the bank can utilize this to increase capital distributions and buyback plans.
The company rewards its shareholders handsomely. In July 2024, the company’s board of directors approved a 9.1% increase in the common stock dividend to $3 per share starting from third-quarter 2024. In the past five years, the company hiked dividends five times with an annualized growth rate of 24.42%. Currently, its payout ratio sits at 35% of earnings.
The company also has a strong liquidity position. As of June 30, 2024, cash and cash equivalents were $206 billion. As of the same date, $77 billion were near-term borrowings.
Given its decent liquidity, its capital distribution activities seem sustainable.
GS’ Private Equity Credit Line Expansion Provides an Edge
Goldman plans to ramp up its lending services to private equity and asset managers and intends to expand internationally.
The private equity market has a strong growth potential as private equity deals are expected to rise, driven by record-high fundraising. These loans are classified as short-term, typically secured by the assets of borrowing firms. These have a lesser risk attached to them. The firm’s focus on the private equity market is a strategic fit.
Goldman Sachs Asset Management, a unit of GS, intends to expand its private credit portfolio to $300 billion in five years from the current $130 billion. Once the company strengthens its operations in the United States, it plans to expand its lending business into Europe, the U.K. and Asia.
What Does GS’ Valuation Suggest?
From a valuation standpoint, the firm appears somewhat expensive relative to the industry. The company is currently trading at a forward 12-month P/E multiple of 11.88X, above the industry average of 9.69X.
P/E F12M
Image Source: Zacks Investment Research
Goldman’s Estimates Favorable
GS stock is expected to deliver a strong result in 2024 and 2024.
Image Source: Zacks Investment Research
Final Words on Goldman
The company’s efforts to refocus on core capital markets business and expansion in private credit lines look encouraging.
However, at the Barclays Conference, Solomon stated that the firm’s trading revenues will probably slide 10% in the third quarter of 2024. The decline will likely be caused by a tough year-over-year comparison and difficult trading conditions in August for fixed-income markets. He also stated that the company’s efforts to narrow its focus on the consumer business will likely hit third-quarter 2024 revenues.
Though its efforts to exit the consumer business are expected to impact third-quarter revenues, the same is likely to generate a return over the long term.
Also, lower SCB requirements will help the company increase its capital distribution activities, boosting investors' confidence in the stock.
Given its stretched valuation, prospective investors might keep GS stock on their radar and wait for a better entry point. Those who already have the GS stock can consider holding it, given strong fundamentals and solid growth potential.
Image: Bigstock
3 Reasons to Keep Goldman in Your Radar Beyond a 24.5% YTD Rise
Shares of The Goldman Sachs Group, Inc. (GS - Free Report) have witnessed strong growth, with its stock surging 24.5% year-to-date compared with the industry's growth of 12.2%.
This stock is also trading slightly below its peers — JPMorgan & Chase (JPM - Free Report) and Morgan Stanley (MS - Free Report) . JPM rose 24% while MS moved up 7% in the said time frame.
Year-to-Date Price Performance
Let’s discuss the factors that will keep driving Goldman's growth further.
Goldman’s Refocus on Wallstreet Operations to Drive Growth
GS decided to refocus on its core strengths of IB and trading operations while scaling back its consumer banking footprint.
In first-quarter 2024, the company completed the sale of GreenSky, its home-improvement lending platform. In fourth-quarter 2023, it sold its Personal Financial Management unit.
Goldman aims to cease unsecured loan offerings to consumers through its digital consumer banking platform — Marcus. In 2023, it sold substantially all of Marcus’s loan portfolio. Apart from these divestitures, the company is set to finalize an agreement to transfer its General Motors credit card business to Barclays (BCS - Free Report) . The companies are still in the final stages of negotiation.
With these initiatives, the corporation is focusing on investments, banking and other market-related activities.
GS’ focus on its Wall Street operations is paying off. In 2022 and 2023, its IB revenues declined 47.9% and 15.5%, respectively, while in the first half of 2024, the metric soared nearly 27% from first-half 2023. The upside was driven by the bounce back in global mergers and acquisitions (M&As), which led to a remarkable improvement in the industry-wide deal value and volume.
At a recently-concluded Barclays conference, CEO David Solomon stated that IB continues to improve, even though activity from financial sponsors has not rebounded as much as expected. Solomon stated that the firm is hopeful that private equity-led deals will bounce back at the end of this year and in 2025.
The company maintains its long-standing #1 rank in announced and completed M&As and ranked #2 in equity underwriting. A solid financial performance of the corporates, buoyant equity markets and expected rate cuts this year, along with Goldman’s leadership position, lent it an edge over its peers.
Goldman to Benefit as Fed Lowers its SCB Requirement
GS came out as a winner after challenging the Federal Reserve to reduce its capital requirements over its June annual stress test result, which initially forced this Wall Street investment bank to hold a higher amount of capital.
The central bank lowered the extra capital level requirement of Goldman Sachs. The bank now must hold a ‘stress capital buffer’ of 6.2%, down from the 6.4% suggested initially in the test.
With this, GS will be required to hold common equity equal to 13.7% of its risk-weighted assets (RWA) instead of the 13.9% the Fed initially advised.
As GS’ capital requirement lowers, the bank can utilize this to increase capital distributions and buyback plans.
The company rewards its shareholders handsomely. In July 2024, the company’s board of directors approved a 9.1% increase in the common stock dividend to $3 per share starting from third-quarter 2024. In the past five years, the company hiked dividends five times with an annualized growth rate of 24.42%. Currently, its payout ratio sits at 35% of earnings.
The company also has a strong liquidity position. As of June 30, 2024, cash and cash equivalents were $206 billion. As of the same date, $77 billion were near-term borrowings.
Given its decent liquidity, its capital distribution activities seem sustainable.
GS’ Private Equity Credit Line Expansion Provides an Edge
Goldman plans to ramp up its lending services to private equity and asset managers and intends to expand internationally.
The private equity market has a strong growth potential as private equity deals are expected to rise, driven by record-high fundraising. These loans are classified as short-term, typically secured by the assets of borrowing firms. These have a lesser risk attached to them. The firm’s focus on the private equity market is a strategic fit.
Goldman Sachs Asset Management, a unit of GS, intends to expand its private credit portfolio to $300 billion in five years from the current $130 billion. Once the company strengthens its operations in the United States, it plans to expand its lending business into Europe, the U.K. and Asia.
What Does GS’ Valuation Suggest?
From a valuation standpoint, the firm appears somewhat expensive relative to the industry. The company is currently trading at a forward 12-month P/E multiple of 11.88X, above the industry average of 9.69X.
P/E F12M
Goldman’s Estimates Favorable
GS stock is expected to deliver a strong result in 2024 and 2024.
Final Words on Goldman
The company’s efforts to refocus on core capital markets business and expansion in private credit lines look encouraging.
However, at the Barclays Conference, Solomon stated that the firm’s trading revenues will probably slide 10% in the third quarter of 2024. The decline will likely be caused by a tough year-over-year comparison and difficult trading conditions in August for fixed-income markets. He also stated that the company’s efforts to narrow its focus on the consumer business will likely hit third-quarter 2024 revenues.
Though its efforts to exit the consumer business are expected to impact third-quarter revenues, the same is likely to generate a return over the long term.
Also, lower SCB requirements will help the company increase its capital distribution activities, boosting investors' confidence in the stock.
Given its stretched valuation, prospective investors might keep GS stock on their radar and wait for a better entry point. Those who already have the GS stock can consider holding it, given strong fundamentals and solid growth potential.
GS currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.