The Razor’s Edge

2-Year Price History

Ockham’s Rating

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GS Revenue

As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company’s stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, GS the high and low end of the Price to Sales per share ratios are 0.91x and 0.49x respectively.

Notice that GS’s current Price to Sales per share ratio is 0.93x, which is high enough compared with historical norms of GS to cause some concern. The current Price to Sales per share is near the upper end of the historical range. In our eyes, this is a negative factor because it is more likely that it will return to the normal range than continue rising outside of the range. At current sales per share levels, we would need to see a decline in the Price to Sales ratio of 33% merely to return GS to its historical average.

GS Cash Earnings

As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of GS, Ockham views their current Cash Earnings as significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from GS. For example, GS’s Cash Earnings ratio per share has fluctuated between 4.82 and 11.47 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where GS is with respect to prior business periods.

So with GS’s current price (latest close of $96.45) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, GS is 39% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn’t exist in a vacuum. So if the market doesn’t recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with GS.

GS Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In GS’s case, the estimated annual dividend is $1.87 resulting in a current dividend yield of 1.94%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from GS against the historic high and low levels over the past 10 years. The highest dividend yield from GS over this period was 3.94% while the lowest dividend yield was 0.36% Given this range, the current dividend yield for GS is below its historical median and not terribly attractive from this perspective.