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Stock Analyst Update

Lingering Issues at Goldman Sachs Should Soon Resolve

Shares of the narrow-moat firm are fairly valued today.


Narrow-moat Goldman Sachs' (GS) overhanging issues should clear in the next quarter or so. Goldman Sachs reported net earnings to common shareholders of $1.72 billion, or $4.69 per diluted share, on net revenue of $9.96 billion for the fourth quarter of 2019. In the quarter, the company booked $1.1 billion of net provision expenses for litigation and regulatory proceedings, of which much was related to the company’s involvement in the 1MDB scandal. For the full year, the company reported earnings per diluted share of $21.03 and generated a return on equity of 10% and return on tangible equity of 10.6%. Excluding the effect of the net provisions for litigation and regulatory proceedings, earnings per diluted share would have been approximately $24.19. Excluding both the net litigation provisions and the company’s net investment in new initiatives, such as its online consumer business Marcus, Apple Card, and transaction banking, its return on equity would have been approximately 12.2% for the year. We don’t anticipate making a material change to our $250 fair value estimate for Goldman Sachs and assess shares that are trading close to 1.1 times book as being fairly valued.

For much of the past couple years, investors seem to have stayed away from Goldman Sachs due to several lingering issues. These issues include skepticism over the $5 billion net revenue growth goal the company laid out in 2017, liabilities stemming from the company’s involvement in the 1MDB scandal, and uncertainty over what goals the new management team under David Solomon would set. All these uncertainties should soon sort themselves out. In its recent conference call management said it will stop talking about the former $5 billion net revenue goal and will unveil different, concrete goals at the company’s investor day on Jan. 29. The litigation accrual in the quarter and reports of settlement talks should mean the 1MDB exposure will also be finalized soon.

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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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