Morningstar | Goldman's 4Q Was Fine; Shares Attractive at or Below Book Value Given Shift in Business Mix
Despite a slowdown in the back half of 2018, narrow-moat Goldman Sachs still reported a strong year. With the stock trading at approximately tangible book value, we believe that it's moderately undervalued. Total net revenue increased 12% in 2018 to $36.6 billion and pretax earnings increased 12% to $12.5 billion. Revenue for the year had a fairly good increase, despite market turbulence in the second half of 2018 causing second half net revenue to be over 10% lower than the first half of 2018. For the year, the company's return on average common equity was 13.3% and the return on tangible common was 14.1%. We don't anticipate making a significant change to our $258 fair value estimate for Goldman Sachs. With the stock currently trading around tangible book value of $196.64 per share and our projection that the company should earn returns on equity in the low teens on a normalized basis, shares look undervalued.Both negative and positive uncertainties for Goldman Sachs have recently cropped up. The negative uncertainty is in regard to any liability for the company's involvement in 1 Malaysia Development Berhad, or 1MDB, while the positive uncertainty is related to changes that the new management team may implement with its front-to-back review of the business. We currently value Goldman Sachs at around $90 billion. Given that the total amount of money raised for 1MDB was around $6.5 billion, even if the company had to reimburse Malaysia for money that had been stolen, the $600 million in fees that Goldman Sachs generated from the deals, and pay some fines, it looks like the market has overreacted to the news.
New management mentioned that they're taking a thorough look at Goldman Sachs' businesses and that they expect to lay out metrics and financial targets for their strategy later in 2019. The company recently stated that they already achieved 50% of the 3-year, $5-billion-net-revenue plan that was laid out in late 2017.
We continue to believe that there's interesting upside to Goldman Sachs' valuation from the shift in the company's business mix to more stable, higher return on equity businesses. Investment management and digital retail financial services is where much of this growth should come from. With this shift, and potentially the increased transparency into the investing and lending segment that investors may not have given the company full credit for, investors could very well pay a higher premium to book value for the company.
For our analysis on the economics of digital wealth management that Goldman Sachs is venturing into, please see our June 2018 special report, "Robo-Advisor Upgrade! Installing a Program for Profitability."
Goldman Sachs Group is a bank holding company and financial holding company. The company is a global investment banking, securities and investment management firm that provides a range of financial services to corporations, financial institutions, governments and individuals. The company operates in four business segments: Investment Banking, which serves public and private sector clients and provides financial advisory services; Global Markets, which serves its clients who come to the company to buy and sell financial products, raise funding and manage risk; Asset Management, which provides investment services; and Consumer & Wealth Management, which provides a range of wealth advisory and banking services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.