Warren Buffett Should Consider Goldman Sachs... Again

Tickers in this article: GS WFC

NEW YORK ( TheStreet) -- It's time for Warren Buffett to consider diversifying his investment in regional banks by buying up shares of Goldman Sachs (GS) , after the standalone investment bank reported far better than expected earnings that included growth across its key trading and banking businesses and a tight control on expenses.

Buffett, whose top financial sector holding is Wells Fargo (WFC) , might want to break his principles on investing only in banks with simple business models and use Goldman as a way to benefit from low interest rates.

Goldman's management of its expenses and a predictable focus on share buybacks has the nation's top investment bank fulfilling some key criteria of the 'Oracle of Omaha's' investing principles.

In fourth quarter earnings, Goldman Sachs reported better than expected adjusted earnings of $2.89 billion, on revenue of $9.24 billion, beating estimates of $1.78 billion and $7.83 billion respectively.

Adjusted earnings per share of $5.60, nearly doubled an adjusted estimate of $3.66 a share, according to analyst forecasts compiled by Bloomberg. Earnings at Goldman reflected growth in top line profitability and strong legwork done on bottom line expense.

It's the latter which might peak Buffett's interest and signal that Goldman Sachs is a changed bank from when the 'Oracle' took a multi-billion dollar preferred stake in the firm to help it survive the financial crisis.

In contrast to a pre-crisis era on Wall Street, Goldman Sachs is doing the heavy lifting to drive overall expense lower. Headcount reductions and relocations of back office staff to low cost financial centers helped Goldman Sachs drive overall expense as a proportion of revenue to below 40%, exceeding analyst estimates.

While the absolute amount of expense was unchanged from 2011 levels, Goldman's falling expense ratios reflect operating leverage, especially in some investment banking and trading businesses.

Meanwhile, Goldman Sachs is one of just a few large cap banks that's been able to predictably lower its share count through stock buybacks, a key component of some of Buffett's largest holdings such as a stake in IBM(IBM) .

In the fourth quarter, Goldman bought back $1.53 billion in shares, exceeding an estimate of $1.2 billion, according to forecasts from Morgan Stanley banking analyst Betsy Graseck. For 2012, the bank bought back nearly $5 billion in stock, or a total of 42 million shares.

Given top line revenue gains across Goldman's businesses in 2012 and share count reductions, the investment bank is on a trajectory to grow its earnings per share , even if its balance sheet shrinks to reflect post-crisis regulations.

In contrast to Buffett's top bank holding Wells Fargo, which is facing uncertainty on key earnings streams , Goldman Sachs stands poised to benefit in 2013 from the Federal Reserve's low interest rates.