Why bank bear Meredith Whitney likes Goldman Sachs
Jul 13th 2009 6:30PM
Updated Dec 4th 2009 6:11PM
Former Oppenheimer analyst Meredith Whitney, known for her early call that Citigroup (C) would need to cut its dividend to conserve capital, likes Goldman Sachs (GS). She's giving the company a "Buy" rating and $186 price target right before it reports earnings on Tuesday.
Whitney, who left Oppenheimer in February to start her own research firm, said that the amount of capital other companies need to raise will benefit Goldman's investment banking operations for some time. With a number of competitors either merged or gone, Goldman stands to capture a much higher percentage of deal values. Corporate debt and equity raising will likely be slow, but that will be offset from growth in government debt issuance.
The note, excerpted by FT Alphaville, says Goldman's capital position is sufficiently strong that the company will likely begin buying back stock. Issuing new stock was a prerequisite to Goldman's repaying its TARP funds in June. Stock repurchases will increase earnings per share, which Whitney believes will be $4.65 for the second quarter of 2009, and $19.65 in 2010. Both targets are materially above current analyst consensus.
Whitney and Credit Suisse (CS) agree that Goldman can generate a return on equity in excess of 15 percent in the near-term. Goldman, which became a bank holding company to access Federal Reserve liquidity programs, will not be allowed to employ the same leverage it used to generate ROEs above 30 percent in past years. Concerns about profitability have resulted in lower valuation multiples, but such fears have faded since the March lows, and the stock has nearly doubled since.
Credit Suisse was particularly enthusiastic about trading results, predicting double-digit gains over the previous quarter, according to a June 30 note obtained by DailyFinance. Competitors do not have the same ability to take trading risks, and less competition in markets will lead to wider spreads and better profitability for Goldman -- including what could be "the second-best core fixed-income quarter ever reported by Goldman as a public company." The Credit Suisse note included an "Outperform" rating and $160 target price on Goldman stock.
It's interesting to see a bear like Whitney so positive on Goldman. But what she's describing is little more than what happens during a typical business cycle: as losing firms go out of business or cut back on operations, the remaining players clean up and make more money. While markets have been volatile, many are offering decent risk premiums to those with capital to commit, and investors should be looking for similar situations across other industries.
James Cullen also edits and writes at CollegeAnalysts.com. He is the vice president of the Boston College Investment Club, which owns shares of GS, but he has no personal position in the stocks mentioned above.