Wachovia Upgrades Goldman Sachs (GS) to Outperform

Wachovia upgrades Goldman Sachs (NYSE: GS) from Market Perform to Outperform. The firm has a $155-$160 valuation range on the stock.

Although the firm is predicting a Q4 that could be worse than Q3, Wachovia believes Goldman Sachs "is still in a power position within the financial services industry." The firm calls capacity shrinkage within the financial industry "a tragedy" but notes that investors leaving the market "will slowly yield higher
pricing for the survivors." Wachovia believes pricing power at Goldman is "inevitable" and feels that this is already evident in prime brokerage given Goldman's second best revenues ever reported in Q3.

Wachovia says Goldman "has room to issue permanent equity hybrid or straight equity if the market demands it", but does not believe this will happen. Further, the firm believes that the market would view this positively as these "stocks are not trading on earnings but rather sustainability."

The firm believes investors can be patient at current levels. Wachovia values Goldman considering: "$863 billion in assets under management, which we estimate is worth $18 billion using group multiples. This implies a $39 billion valuation for the strongest investment bank in the world with a best in class advisory business, prime brokerage business, fixed income trading, and equity trading."

Wachovia's valuation range on Goldman is based on 1.5x estimated Q4 book value.

The Goldman Sachs Group, Inc. provides a range of investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide.

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