ModernGraham Valuation: Goldman Sachs (GS)


Company Profile (obtained from Google Finance): The Goldman Sachs Group, Inc. (Goldman Sachs) is a global investment banking, securities and investment management firm that provides a range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Goldman Sachs operates in four segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management. In July 2013, Suncorp Group Ltd announced the completion of the Non-core portfolio sale to the Company. Effective August 6, 2013, Goldman Sachs Group Inc (Goldman) increased its interest by acquiring an 18.7% interest in Red de Carreteras de Occidente SAB de CV, a unit of Goldman’s Goldman Sachs Infrastructure Partners fund, from Empresas ICA SAB de CV. In October 2013, Goldman Sachs Group Inc’s unit bought a 50% stake in privately-held British motor insurer Hastings.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 5/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests: Score = 2/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (explanation of the ModernGraham valuation model):

Key Data:

MG Value $23
MG Opinion Overvalued
Value Based on 3% Growth $200
Value Based on 0% Growth $117
Market Implied Growth Rate 1.61%
PEmg 11.72
PB Ratio 0.93

Balance Sheet – 6/30/2013 (an Introduction to the Balance Sheet)

Total Debt $162,042,000,000
Total Assets $938,456,000,000
Intangible Assets $4,494,000,000
Total Liabilities $860,413,000,000
Outstanding Shares 450,480,000


Earnings Per Share – Diluted

2013 (estimate) $14.53
2012 $14.48
2011 $7.98
2010 $14.27
2009 $24.30
2008 $5.09
2007 $25.15
2006 $19.98
2005 $11.25
2004 $8.92
2003 $5.87

Earnings Per Share – Modern Graham

2013 (estimate) $13.82
2012 $13.39
2011 $13.68
2010 $16.94
2009 $17.90
2008 $14.49


Goldman Sachs has failed to demonstrate sufficient earnings growth over the last 10 years to justify its current price.  In fact, the normalized earnings per share (EPSmg) has dropped from $14.49 in 2008 to $13.39 in 2012.  As a result, Goldman Sachs would appear to be overvalued based on the ModernGraham valuation model; however, the market is only implying a growth rate of 1.6% and if the company achieves a growth rate of just 3%, it would be valued at $200.  As a result, investors should keep their eye on this company, but because of the lack of demonstrated historical growth, the company is likely not suitable for either the Defensive or Enterprising Investor at this time.

What do you think?  Is Goldman Sachs overvalued or does Mr. Market have it right?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Goldman Sachs at the time of publication, and had no intention of purchasing a stake in the next 72 hours.

Photo Credit:  Andrew Magill






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