Goldman Sachs Trading at a Premium: Why Is It Still Rated a ‘Buy’?



Why analysts are bullish about Goldman Sachs

Goldman Sachs’ 1Q16 earnings of $2.68 per share surpassed expectations but fell 60% year-over-year. Shares, however, surged 5% in the following two days after the earnings announcement as investors had already priced in the weak earnings. The stock had priced in the sharp fall in trading and investment banking revenues as well as perceived weakness in the US economy. With these fears easing away, the stock might get a boost in the remaining quarters. Analysts see this as a good value buy at current levels.

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So far in 2016, Goldman Sachs shares have fallen 8% and underperformed the financial sector. The Financial Select Sector SPDR ETF (XLF) represents the US financials sector.

On April 20, the stock closed at $166.98. With an average consensus price target of $186.26, it’s expected to grow 12% in the next 12 months. Of the 29 analysts following the stock, 16 (55%) have assigned “buy” ratings. Goldman Sachs has one “sell” rating and 12 “hold” ratings.

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Shares of the company trade at a premium compared to large banks on a price-to-book basis. It’s currently trading at a price-to-book-value multiple of 0.87x. In comparison, large-capped peers like Citigroup (C), Morgan Stanley (MS), and Bank of America (BAC) are trading at price-to-book multiples of 0.6x, 0.7x, and 0.6x, respectively.


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