Goldman Sachs - Fairly Valued As Bank Focuses On Costs And Long Term

| About: Goldman Sachs (GS)

Investors in Goldman Sachs (NYSE:GS) were slightly disappointed with the firm's trading performance in the final quarter of 2013, offset by a strong investment banking performance.

While the bank trades at just 10-11 times earnings, the potential drivers for outperformance are limited. A recovery of the trading activities could however unleash some upside potential.

Fourth Quarter Earnings Highlights

Goldman Sachs announced fourth quarter revenues of $8.78 billion on Thursday, down 4.9% from a year ago. While the annual performance was relatively weak, revenues rose by 30.6% compared to a weak third quarter.

Reported earnings came in at $2.25 billion which was down 20.6% compared to the comparable period last year, but up 57.3% compared to the third quarter.

Diluted earnings per share fell by 18% to $4.60 on an annual basis after the company repurchased roughly 3% of its outstanding share base. Earnings came in ahead of consensus estimates of $4.18 per share.

Looking Into The Fourth Quarter In Detail

The investment banking business performed very strong, reporting revenues of $1.72 billion which is up 47% compared to the third quarter and up 22% on an annual basis. The strong performance is the result of a strong initial public offering and underwriting market.

The institutional clients business reported a 19% increase in revenues on an annual basis to $3.41 billion. General low activity levels in the fixed income, currency and commodity client execution business resulted in a 15% decline in revenues while equity revenues have been higher.

Investment management revenues rose by 31% on an annual basis towards $1.60 billion as assets under supervision broke through the one trillion mark.

As such it's where the investment banking businesses of the bank supported the overall results, reporting the second best results in the firm's history, while trading activities were slow.

2013 Review

For 2013, Goldman Sachs reported revenues of $34.2 billion which was essentially unchanged from the year before. As a result of a tight control on spending, reported earnings rose by 6% to $7.7 billion.

Trading around $176 per share, the bank trades at 1.15 times its normal book value at $152.48 per share and 1.23 times its tangible book value of $143.11 per share.

An often cited fact is that bankers at the firm do very well for themselves. Even as compensation expenses fell another percentage point to 37% of total revenues, which was the second lowest percentage since the public offering in 1999, the average banker still earns more than $383,000 per annum.

Goldman continues to focus on expenses, both in terms of staff and non-staff related expenses. Trading remains under pressure with lower activity levels in multiple key markets. Principal trading of banks in commodities is under pressure with the Federal Reserve Board possibly limiting trading activities of banks in this area.

This was offset by a buoyant market for equities underwriting through initial public offerings and the many merger and acquisition deals around the world.

Takeaway For Investors

Long-term investors have seen modest returns as the bank avoided massive dilution unlike many of its competitors during the financial crisis. Shares are still removed from their highs around $230 in 2007 after which shares fell towards $50 a year later. The bank has recovered quite nicely, trading around $175 at the moment.

The accompanying $80 billion valuation is quite fair, valuing the bank at 10-11 times annual earnings. Despite a recent 10% dividend hike, the quarterly dividend of $0.55 per share provides investors with a modest 1.2% dividend yield.

Goldman is focusing on the long term and its diversified operations are a big plus, even with trading activity at low levels. Back in October of last year, I last took a look at the prospects for Goldman.

After witnessing so much controversy during the crisis, Goldman has refocused on trust and strong relationships in banking driving strong results within the investment banking business. Combined with a focus on cutting costs, while trying to not impact morale, investors have seen greater payouts. All of this has boosted Goldman's share price.

The increased discipline with regard to employee payouts and focus on the long term, combined with the modest valuation makes the bank fairly valued in my opinion. Unless trading activity picks up meaningfully I don't see enough compelling drivers for the shares in the coming periods.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.