Goldman Sachs Is Trading at Its Cheapest Price in History

(This is a highly-abbreviated version of a full SumZero report republished with the author's consent)

Contributor: Alex Bossert.
Firm: Uncited. Hedge Fund.
Location: Minneapolis, MN.

Recommendation: Long Shares of Goldman Sachs (NYSE: GS).
Timeframe: 2 Years and Beyond
Recent Price: $96.00
Target Price: $200.00
Strategy: Deep Value

Disclosure: The author of this report had an active position in this security at the time of its posting.

Quick Thesis:
Goldman is trading for the cheapest price in its history as a public company.

Goldman has been hit from every angle recently. Some of the challenging factors include subpar loan demand, low M&A, IPO and other investment banking business, regulatory threats, market deleveraging, lower company leverage, constant criticism etc. This has resulted in one of the world’s premier investment banks trading at less than 75% of tangible book. Goldman is worth over $200 per share and investors are ignoring many positive factors going forward.

Over the course of Goldman’s history they have been very nimble in shifting assets to the highest ROI areas, assuming that ROE will be at these very depressed levels forever is not an accurate conclusion. Goldman is trading at a large discount to the liquidating value of its assets that are nearly all mark to market. Investors are ignoring the opportunities and tailwinds that exist.

There is a huge potential to grow significantly overseas and competition has been reduced from the financial crisis. In addition, the reduction of the firm’s temporary liquidity will add a few billion to the bottom line. Increased leverage and a return to more risk taking will also boost results. Large share buybacks at such an advantageous price will further enhance value.

Since Goldman’s IPO in 1999 through 2011 book value per share has grown 16% per year, Return on equity has averaged 18.5% and pretax margins has averaged 31%. Keep in mind that these numbers include the recession years 2008-2011. From 2008-2011 book value per share grew 15% and return on equity averaged 12%. Goldman has never lost money as a public company except for the 4th quarter of 2008.

Tangible book value per share was $124 at the end of the first quarter. At 75% of book value, this is the cheapest Goldman has ever traded at except right after the Lehman bankruptcy. In May of 1999 Goldman Sachs went public at $70 per share. Thirteen years later the stock is only 35% above its IPO price but tangible book value per share has increased from $23 in 1999 to $124 today. In addition, earnings per share has increased from $5.60 per share in 1999 to $15.22 in 2010. According to Boykin Curry’s Value Investing Congress presentation, the liquidating value of Goldman a year ago was $150 per share.

If book value grows 12% going forward (even at a 12% ROE book value will grow faster because of accretive buybacks), tangible book value will grow to $174 by the end of 2014. At a multiple of 1.2-1.4x book value the company is worth $208-$243 when very depressed growth levels are assumed. If Goldman is able to generate ROE’s of 14-16%, it’s worth up to $270 per share.

Goldman is trading cheap because of the harsh criticism they have received, the current depressed earnings and because investors assume new regulation will hurt them significantly. However all of these factors are not permanent issues. Investors are completely missing that Goldman has many opportunities and tailwinds going forward.

There is a huge potential to grow significantly overseas and competition has been reduced from the financial crisis. In addition, the reduction of temporary liquidity will add a few billion to the bottom line. Increased leverage and a return to more risk taking will also boost results.

Share buybacks at such an advantageous price are frosting on the cake. Goldman repurchased 9% of its stock last year. Due to options exercises they reduced shares outstanding by 3%. Goldman repurchased a little under 1% of its stock in the first quarter. They said buybacks will continue.

Buffett was confident enough in their business to invest back during the financial crisis. Berkshire received 43.5 million in warrants to purchase stock at $115 per share. The stock is trading for 20% less than Buffett’s investment.

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