Can 3Q16 Boost Goldman Sachs’s Suppressed Valuations?



PBV ratios

Generally, banking stocks (XLF) trade between 1x–2x their book values. Stocks trading lower than their book value attract investor attention because they are considered to be generating extremely poor returns.

Price-to-book value (or PBV) compares a company’s current market price to its book value. These ratios are commonly used to compare financial services firms because most assets and liabilities of banks are valued at market value. If a company trades lower than its book value, it means that either the asset value is overstated or the company is generating a poor return on its assets.

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Goldman Sachs’s valuations

Goldman Sachs (GS) trades at a 10% discount to its book value and 11.8x its one-year forward earnings. In the last five years, it has traded at an average premium of 3% to its book value and posted a PE multiple of 10.3x. These measures are also well below what Goldman’s average PE and PBV ratios have been since it went public in 1999.

Its valuations are currently suppressed, and analysts consider it an inexpensive value buy. Its ability to slash costs, combined with a solid balance sheet, should help Goldman Sachs in the current downturn.

Currently, Goldman Sachs’s peers JP Morgan (JPM), Wells Fargo (WFC), and BNY Mellon (BK) are trading above their book values.


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