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Here is a look at how Goldman Sachs (NYSE:GS) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

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 OpinionOvervalued
Value Based on 3% Growth$200
Value Based on 0% Growth$117
Market Implied Growth Rate1.61%
PEmg11.72
PB Ratio0.93

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 Shares450,480,000

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

Conclusion:

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.

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.

Source: ModernGraham Valuation Of Goldman Sachs