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Goldman Sachs Floats On Buffett Moat

Stocks in this article: GS BRK.A WFC MS

NEW YORK ( TheStreet) -- As Warren Buffett prepares to make a "significant" investment in Goldman Sachs (GS) shares, the nation's top standalone investment bank is just beginning to prove itself as an investment worthy of the pedigree of Berkshire Hathaway (BRK.A).

For the seventh quarter out of nine, Goldman Sachs (GS) beat earnings estimates on continued trading and underwriting market share gains. Meanwhile, banking conglomerates and international players have retrenched from Wall Street.

More importantly, as Goldman's near 10% first quarter earnings growth generally reflects a recovery in merger activity, debt underwriting and a thawing of the market for initial public offerings, the firm has laid out a predictable path towards growing its bottom line.

In its first quarter earnings report, Goldman Sachs said it repurchased $1.52 billion in shares during the quarter and received an authorization from its Board of Directors to buy back an additional 75 million shares.

Overall, Goldman Sachs can now repurchase 86.4 million shares, or roughly 18.5% of the firm's outstanding shares. In 2012, the authorization was for a buyback of 46 million shares.

Goldman said in March it would delay capital returns until at least mid-year after the firm passed the Federal Reserve's annual stress tests with mixed results.

The investment bank's shareholders are also getting a larger piece of the firm's recovering post-crisis earnings as a result of declining compensation expenses and overall expense ratios.

Compensation expense fell sharply in the fourth quarter below 40% of revenue. During the first quarter, Goldman's expense ratio declined 1% from year-ago levels to 43%.

All told, the bank is beginning to look like one of the protected and disciplined businesses Buffett likes to invest in.

When taking a near $11 billion stake in IBM (IBM) in 2011, Buffett made it a priority to explain to his shareholders why he was investing in companies with predictable growth prospects and prospects for expense reductions, including. IBM's EPS growth prospect were supported by a planned $50 billion share repurchase program.

Unlike most banking conglomerates and Wall Street players, Goldman Sachs increasingly fits within the IBM-like criteria that Buffett outlined in his 2011 shareholder letter.

The investment bank is growing its earnings-per-share through net share repurchases and top line growth that makes its financial metrics comparable to other large Berkshire holdings, including IBM (IBM), American Express (AXP), Coca-Cola (KO) and to a lesser extent, Wells Fargo (WFC).

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