Goldman Sachs: Getting Fully Valued

| About: Goldman Sachs (GS)

Goldman Sachs (NYSE:GS) another of our major financial sector holdings, reports their q4 13 financial results before the opening bell on Thursday, January 16th, 2014.

Analyst consensus is expecting $4.21 in earnings per share (EPS) on $7.7 billion in revenue, for expected year over year declines of 25% in EPS on a 9% drop in revenues.

While those expected declines might look scary, readers need to understand the brokers, particularly the investment that commit their own capital to the trading P/L, have VERY volatile results, and I am expecting GS to beat the consensus estimates handily when they report Thursday morning.

Both the consensus EPS and revenue estimates have declined since the October '13 earnings report, so despite the market tailwinds, analysts have grown more cautious on GS's results.

In Q3 13, Goldman missed badly on revenues thanks to the fixed-income group, which saw revenues fall 50% year-over-year.

GS rose 39% in 2013, not including the dividend.

As wrote with our JP Morgan preview, Financials could be the new Consumer Staples given the Dodd-Frank regulation, and the Washington regulatory environment. Goldman Sachs is no exception.

Since the investment bank has more or less exited the proprietary trading business, it is our opinion (and not quantified but amounts to nothing more than a rough guess) that the death of prop trading will cost GS - over time - About $10 per share, per year.

Yes, the world's greatest trading desk, is still committing capital, but no bank can afford what JPMorgan (NYSE:JPM) did with the London Whale, and draw that Justice Department and regulatory scrutiny.

Given that the SP 500 was up +30% in 2013, the corporate bond markets saw record bond issuance, etc. and risk was definitely on all year, consensus analyst expectations are that GS saw revenues decline -3% which generated just 6% EPS growth.

Think about that: if you lived through the 1980's and 1990's as I did and followed the brokers, raging bull markets usually resulted in outsized EPS and revenue growth.

GS's 2013 revenue and EPS growth looks pathetic in comparison to the robust capital market returns in 2013. You'd think the bank had suddenly become a commodity trading house.

Trading at 10(x) - 11 earnings for 85 - 10% return on equity (ROE) presently, and expected mid to high single digit revenue and EPS growth from 2014 through 2016, GS has now become just like the rest of the Financials: a slow growing, utility like, stock.

(Part of the reason ROE's are depressed is that Dodd-Frank and the new capital rules are forcing banks to hold more capital against risk assets, and also take less risk to generate trading gains. The banks and brokers are "safer" enterprises in terms of the volatility of their income statements and balance sheets, and also less profitable.)

Morningstar puts an intrinsic value to GS of $151 per share, while our own model puts a fair value on the stock near $160, so GS is getting close to fully-valued.

Technically, GS ran from $75 to $190, from March '09 to late 2009 and has been in the same trading range ever since. I do worry that with a robust 2013, in terms of trading and index results, the iconic bank just didn't generate much revenue and EPS growth.

If the stock pops above $180 after Thursday earnings report we'd be tempted to sell another 25% of our position.

Disclosure: I am long GS, JPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.