How Goldman Sachs Could Rise 20% in 2018 (Maybe 40% Over Time)

December 7, 2017 by Jon C. Ogg

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Goldman Sachs Group Inc. (NYSE: GS) could be in for a good 2018. This stock has greatly lagged the market gains in 2017, and it has lagged peer bank and financial players as well. The firm that has the nickname “Golden Slacks” was already rated as Buy at Merrill Lynch, but now the firm has raised its status by adding it to the prized US 1 list. Its price objective was also raised to $300 from $290.

For the record, this new target is roughly 20% higher than the prior consensus analyst price target. Note that the prior street-high analyst price target on Goldman Sachs was $294.

Investors should also consider that this call could be a big boost for the Dow Jones Industrial Average if it is proven correct. 24/7 Wall St. has been conducting 2018 outlook reviews of its own, and this upgrade under review would put Goldman Sachs at even more implied upside than the most recent five potential Dow surprises for 2018 we just reviewed.

There are several reasons that Merrill Lynch is so positive on its rival. One is the relative underperformance against the market and peers. Other driving forces are a more favorable outlook with rising GDP growth, upside catalysts and positive risk/reward metrics.

One thing that stands out about this call for 20% upside is that most analyst price targets on Dow Jones Industrial Average or S&P 500 stocks come with upside projections of about 8% at this time. Some are of course higher, but this is more than double the average implied upside. And Merrill Lynch went further out on a limb with saying 20% is the base case — with closer to 40% upside in the more bullish case versus about 20% downside in the bearish case.

Merrill Lynch has by and large left 2018 earnings per share unchanged, but the firm now sees earnings per share of $23 (up from $22 previously) for 2019.

Goldman Sachs is deemed to be a tax reform winner. The report noted that Goldman Sachs looks relatively attractive since its stock hasn’t moved much. Also noted is the firm’s $5 billion revenue initiative adding about two full points to its return on equity. That initiative is from higher lending, FICC, investment management and its share in trading and investment banking. Merrill Lynch also feels that deregulation and tax reform could also potentially add two points to the return on equity.

The newest Merrill Lynch investment rationale says:

We expect Goldman Sachs to outperform from rising returns and a rising multiple. Given its recent relative performance and valuation, a mostly favorable capital markets outlook, rising global growth, tax reform, de-regulation, its $5B revenue initiative, and its skill set in innovation/technology and risk management, we see the risk/reward as attractive.

The firm updated revenues and earnings here. After revenue of $30.60 billion in 2016, Merrill Lynch sees 2017 revenue of $32.118 billion, rising to $33 billion in 2018 and almost $35 billion in 2019.

In Thursday’s midday trading, the stock was up 1% at $248.24, and the prior consensus analyst target from Thomson Reuters was listed as $250.21. Goldman Sachs has a 52-week trading range of $209.62 to $255.15, and it has a market cap of about $94 billion. After a return on equity of 9% in 2016, the report is projecting that to grow to 11% in 2017 and 2018, followed by 12% in 2019.

There is something that some investors should consider here. If Merrill Lynch is right in its 20% upside forecast (and even more if it rises close to 40% out on a longer horizon), it would be great for the Dow Jones Industrial Average. The Dow is a price-weighted index rather than a market cap-weighted one, and Goldman Sachs is the second highest weighting with a weight of 7%. That is higher than the weighting of the bottom six components combined (Verizon, Coca-Cola, Intel, Cisco, Pfizer and GE) by weighting.