Goldman Sachs recently passed the Federal Reserve’s annual stress test and lifted its dividend by 25%.
Michael Nagle/Bloomberg
Wall Street is bracing for an economic downturn and that has made investors—particularly bank investors—nervous. But despite the worries, there are still banks where shareholders can find comfort.
Goldman Sachs (ticker: GS) is rapidly emerging as one of those banks. Analysts at Bank of America upgraded Goldman Sachs stock to Buy from Neutral on Wednesday and lifted their price target on shares by $20 to $380 apiece, implying 27% upside from recent trading levels.
The upgrade, however, isn’t an endorsement of the banking sector. Rather, the analysts expect a “worsening economic backdrop” that is likely to affect banks with larger loan books. Goldman Sachs has been making strides to offer more consumer-oriented services, but it is still primarily an investment bank.
Goldman Sachs also looks cheap, trading at 1.1 times its tangible book value and eight times projected 2023 earnings—both of which are below the stock’s five-year average of 1.2 times tangible book and 9.5 times forward earnings, according to FactSet data.
The analysts’ bullishness doesn’t reflect an increase in earnings expectations. Rather, the analyst team lowered its 2022 and 2023 earnings expectations by 14% and 4%, respectively, but believes that these lowered expectations are already baked into the current stock price.
That said, Bank of America analysts are optimistic that Goldman Sachs can push its valuation even higher—to the range of 1.3 times to 1.5 times tangible book value—as the bank delivers a return on tangible equity, or ROTE, in excess of 15%.
There is evidence that a higher valuation is possible. While deal making and the initial public offering market dried up this year due to market volatility and economic concerns, Goldman Sachs was still able to post a ROTE of 15.8% in the first quarter, thanks in part to a 21% year-over-year increase in fixed-income trading. That is a trend that is likely to continue amid the Federal Reserve’s rate-increase cycle.
“We believe that the volatility in the interest rates, FX, commodities markets is unlikely going away soon and should serve as a tailwind for the markets business,” Ebrahim Poonawala, analyst at Bank of America, wrote Wednesday. He expects that second-quarter earnings will show a 22% year-over-year increase in trading revenue while investment banking revenue will be down by 58%.
Bank of America’s endorsement of Goldman Sachs’ shares comes after the investment bank passed the Federal Reserve’s annual stress test and lifted its dividend by 25%.
While recent market chaos has hurt most portfolios, it seems to be helping Goldman Sachs.
Write to Carleton English at carleton.english@dowjones.com
Source: barrons.com
