Saying Goldman Sachs (GS) Can't Thrive Like Arguing Bumble Bees Can't Fly: Oppenheimer

(Updated - September 21, 2015 9:20 AM EDT)

Oppenheimer upgraded Goldman Sachs (NYSE: GS) from Perform to Outperform with a price target of $236. Analyst Chris Kotowski noted the bank's above-average returns and below-average valuation, and he said the argument that Goldman cannot thrive in this environment is increasingly sounding like the argument that bumble bees can't fly

"Bumble bees' wings are too small and their bodies are too heavy to fly, and Goldman's FICC business is too large and important to earn good returns. And yet, bumble bees do fly and Goldman consistently earns better than industry average returns," said Kotowski.

"We have been on the sidelines with respect to Goldman's stock mainly because we have had a bearish outlook on the trend in FICC trading. GS's FICC trading accounted for 25% of revenues in 2014 (48% in 2009), and for the industry FICC trading revenues have been down in 17 of the last 22 quarters. Indeed, Goldman's stock has underperformed in the past few years, up just 10% since the beginning of 2010 vs. 67% for the BKX and 76% for the S&P 500."

Kotowski continued, "Since 2011 Goldman has earned an average operating ROTCE of 11.6% vs. 11.3% for our large bank composite. GS's ROTCE YTD 2015 is 13.7% vs. 12.5% for the industry. We expect this pattern to continue in 2015-16, but nevertheless GS trades at 9.2x forward consensus and 1.1x TBV vs. the industry at 11.8x and 1.5x on average since 2010. At the same time Goldman's revenue mix is rapidly shifting to less capital-intensive businesses (investment banking, equities and investment management). These now account for 60% of revenues, up from 46% in 2010, while the more capitalintensive businesses (FICC and I & L) declined from 54% to 40%."

For an analyst ratings summary and ratings history on Goldman Sachs click here. For more ratings news on Goldman Sachs click here.

Shares of Goldman Sachs closed at $180.94 yesterday.

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