Goldman Sachs: Financial Winner

NEW YORK ( TheStreet) - Goldman Sachs ( GS) was the winner among the largest U.S. financial companies on Tuesday, with shares rising over 2% to close at $158.65.

The continued flow of merger deals appeared to buoy the broad market. There were several reports on Monday saying that Office Depot ( ODP) and OfficeMax ( OMX) were negotiating a deal.

There was also a relatively small bank deal on Tuesday, with Capital One ( COF) announcing that it had agreed to sell its $7 billion portfolio of Best Buy ( BBY) credit card receivables to Citigroup ( C), for undisclosed terms. Acquisitions are among the strategies being considered by Citigroup to realize profits from its $55 billion in deferred tax assets.

Citigroup's shares rose 1.5% to close at $44.50. Capital One was down 2% to close at $53.12, following disappointment on Friday over the company's sharp decline in credit card balances.

Bank stocks moved in line with the broad indexes. The KBW Bank Index ( I:BKX) rose 1% to close at 55.46, with all but five of the 24 index components showing gains for the session.

"Sequestration Friday"

Some investors were jittery as 2012 drew to a close and negotiations in Washington over the fiscal cliff brought the U.S. closer to a massive combination of federal spending cuts and tax increases, which were averted with a compromise deal early in January. However, there seems to be little worry over the "sequestration" that may take place on March 1, without another compromise deal between Congress and President Obama. This latest fiscal deadline is a set of federal spending cuts totaling $1.2 trillion over a 10-year period, including an $85 billion spending reduction for the current fiscal year.

The Congressional Budget Office has estimated that the spending cuts could slow U.S. GDP growth by 0.6% this year and 1.25% during 2014. Speaking at the White House on Tuesday, President Obama on Tuesday said that the "meat cleaver approach" of the spending cuts "will jeopardize our military readiness," and add "hundreds of thousands of Americans to the unemployment rolls." The president also said that the cuts "won't consider whether we're cutting some bloated program that has outlived its usefulness, or a vital service that Americans depend on every single day."

The Republican leadership in Congress seems unlikely to agree to a compromise that includes tax increases, following the tax increases that helped avert the fiscal cliff.

Following the President's speech, Speaker of the House John Boehner (R-Ohio) said in a statement that "the president advanced an argument Republicans have been making for a year: his sequester is the wrong way to cut spending."

"Just last month, the president got his higher taxes on the wealthy, and he's already back for more," Boehner said, adding that "replacing the president's sequester will require a plan to cut spending that will put us on the path to a budget that is balanced in 10 years."

Oppenheimer chief investment strategist John Stoltzfus early on Tuesday said in a report that "we expect (as per historic precedent) that cooler heads will prevail even as political rhetoric may first reach toward the extremes in attempting to appease all constituencies before a bipartisan solution to avert sequestration is reached."

More Bank Bashing On-Tap

Members of Congress are not in Washington this week, so it should be a relatively quiet week among politicians who fail to realize that breaking up the largest U.S. banks may not be in the best long-term interests of the United States. After all, it seems quite unlikely other countries will make similar moves to make their own banks less competitive.

FIG Partners analyst Christopher Marinac said in his "weekly musings" report on Tuesday that Senator Elizabeth Warren (D-Mass.), who is among this year's class of freshman senators, "attended her first meeting of the Senate Banking Committee and appeared noticeably angry towards the Banking Industry."

"One long-time Bank CEO remarked to us that it was the most contentious meeting he has ever seen," Marinac said. The analyst asked "how many pounds of flesh are Elizabeth Warren and her fellow anti-bank followers going to extract."

Marinac said that "as much as other systemically-important banks could be forced to make changes, we think Bank of America ( BAC) is the odds-on favorite for a symbolic move that satisfies the politicians that they were productive in their Anti-Bank pursuits."

These moves could include accelerated branch sales, a possible decision to exit smaller metropolitan areas, and even "splitting up BAC into a separate Investment Bank from the traditional General Bank for commercial and retail operations."

Goldman Sachs

Goldman's shares have now returned a very impressive 24% year-to-date, following a 43% return during 2012. Last year's performance was a partial recovery from a 46% drop during 2011. Putting all that together, the shares are down 3% since the end of 2010.

The shares trade for 1.2 times their reported Dec. 31 tangible book value of $134.06, and for 10.7 times the consensus 2014 EPS estimate of $14.89, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $13.58.

Goldman reported 2012 net earnings applicable to common stockholders of $7.3 billion, or $14.13 a share, increasing from $2.5 billion, or $4.51 a share, as the company's debt underwriting business saw a major recovery, and rising markets helped it earn solid profits on investments. The company reported a return on average common equity of 10.7% for 2012, increasing from 3.7% the previous year.

Credit Suisse analyst Howard Chen rates Goldman Sachs "outperform," with a 12-month price target of $160.00, saying in a report on Feb. 12 that "current valuations continue to suggest very low embedded return expectations."

Chen called Goldman "a best-in-class brokerage franchise with solid market positioning across myriad client businesses and a strong balance sheet," and said that "with a proven ability to gain and sustain market share across the franchise and a long track record of performance and achieving premier returns, we expect GS to continue to deliver fundamental results that are at the high end of the peer group."

Credit Suisse estimates Goldman will earn $13.60 a share this year, and is way out in front of the consensus, estimating 2014 EPS of $16.10.

GS Chart GS data by YCharts

Interested in more on Goldman Sachs? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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