For a while there, I started to think that Goldman Sachs Group, Inc. (NYSE:GS) was getting ahead of itself, but now I’m not so sure. Goldman Sachs is, in my opinion, one of the most exciting financial companies to invest in, and now I believe it’s trading at a discount. I think it’s once again time to examine the company that Warren Buffett himself called “a bet on brains.”
Who is Goldman Sachs?
With almost $1 trillion in assets under management, Goldman Sachs is one of the world’s leading investment banks, providing a range of services to corporations, governments and high-net-worth individuals. Goldman’s revenue rose by 19% in 2012, which was a major catalyst for the 50% move to the upside in the past year or so.
Goldman Sachs Group, Inc. (NYSE:GS) breaks its business into four segments. The investment banking segment (15% of 2012 revenue) provides financial advisory and underwriting services to corporations, governments, other banks and individuals. Investment Management (15%) provides prime brokerage, financing services and securities lending services. Investing and Lending (17%), which experienced the best growth in 2012, is made up of Goldman’s revenue from its proprietary lending and investing activities. Finally, the largest segment, Institutional Client Services (53%), includes all of the company’s revenue from market making and execution operations.
Why invest in Goldman?
I’ve been a big fan of Goldman Sachs Group, Inc. (NYSE:GS) for a long time. However, I wanted to wait for a little bit of a pullback before taking a serious look. Well, recently we got one, from the high of $159 to the current level of around $148, a 7% correction. Even though this represents a 63% gain from the 52-week low of $90.43, I believe the stock is still very attractively valued and has nowhere to go but up over the next few years.
At just 11 times earnings, Goldman is projected to earn $13.64 per share this year, and the consensus calls for this to increase to $14.96 and $16.23 in 2014 and 2015, respectively. This translates into average annual forward growth of 9.1%, which is a fantastic growth rate for such a low valuation. Additionally, if you think the economic recovery will continue for several more years (as I do), this growth rate could prove to be very conservative indeed.
Competitors
Goldman Sachs Group, Inc. (NYSE:GS) competes with all of the major financial companies with investment services, so to put Goldman’s value to the test, I’d like to briefly compare it to JPMorgan Chase & Co. (NYSE:JPM), which is my overall favorite financial sector company, and Morgan Stanley (NYSE:MS), another power player.
Morgan Stanley is one of the largest financial firms in the U.S., with investment banking, securities and wealth management services. Of the two companies I just mentioned, it’s the closest to Goldman in terms of the makeup of its business. 2012 was not as kind to Morgan Stanley (NYSE:MS) as it was to Goldman, and actually was the exact opposite, as Morgan’s revenue declined by 19% due to weak client activity. As a result, the company reported a loss of $0.04 per share last year (a major red flag for any prospective long-term investment). Revenue is supposed to rebound nicely in the coming years. However, I think Goldman’s performance over the past several years is more indicative of a healthy company.
JPMorgan Chase & Co. (NYSE:JPM) is several times larger than Goldman, with $2.4 trillion in assets under management. In addition to investment banking, the company offers consumer and business banking, credit card services and more. I believe that JPMorgan was the savviest financial firm during the financial crisis, picking up Washington Mutual and Bear Stearns, along with their accompanying market share, for a fraction of their value. I’ve written more extensively about the merits of JPMorgan as an investment, however suffice it to say that I have the highest level of regard for the company. JPMorgan Chase & Co. (NYSE:JPM) currently trades at a very attractive 9.6 times earnings, however the company’s projected forward growth rate is not as high as Goldman’s.
Final thoughts…
Again, to reiterate what Warren Buffett said when he made a huge investment in Goldman Sachs Group, Inc. (NYSE:GS) in the wake of the financial crisis, the company truly has the most talent of any investment bank. Goldman certainly knows the value of retaining talent, and is willing to pay well for it. In fact, compensation expenses in 2012 were 40% of net revenue! Goldman Sachs is truly a bet on brains, and it’s a bet that I’m definitely willing to make.
The article A Bet On The Smartest Bankers In The Business originally appeared on Fool.com and is written by Matthew Frankel.
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