Michael Wong: Narrow-moat Goldman Sachs is currently trading at around tangible book value, and it has over 30% upside to our fair value estimate. Many investment banks have had a relatively slow start to the year, but Goldman Sachs still had an annualized 11.7% return on tangible equity during the first quarter, which generally would justify the company trading at a premium to its tangible book value. Our fair value estimate correlates to a price/tangible book value of about 1.3 times and a normalized return on tangible common equity of 13% to 14%.
The most interesting part of the Goldman Sachs story right now is the market not giving the company credit for all of the initiatives that the company has in the pipeline. This reminds us a lot of the period right after Morgan Stanley did its JV with Smith Barney, where it was fairly clear to us that Morgan Stanley was increasing its proportion of capital light and relatively steady earnings that would improve return on equity, and the path to increase those earnings was fairly clear. Goldman Sachs is doing something similar but about a decade later.
Among Goldman's newer initiatives include a push into more consumer finance, such as deposit taking and consumer loans with its Marcus digital bank; corporate cash management; asset and wealth management; and optimizing some of its traditional businesses such as its fixed income, currency, and commodities trading operations. While it might be difficult to see the bottom-line effects of these new initiatives during the next two years--as the company is in an investment stage to build out these businesses, so costs will be a bit elevated and there remains the overhang of a potential legal settlement--we believe the company is pursuing a reasonable strategy that should improve the company's long-run return on equity and earnings quality. With a higher ROE, a more transparent business, and more steady earnings, we believe the market will eventually value the company like us at a material premium to tangible book value.