Goldman Sachs Group, Inc. (GS) Jeff Nickell
Date: 11/20/06 Consensus Estimate 08/05A 08/06E 08/07E
Sector: Financials EPS $16.46 $18.52 $17.55
Industry: General Finance P/E 12.25 10.88 11.49
Current Price: $201.60 Long Term Growth Rate: 15.81%
52 Wk Price Range: $124.23-$203.35 Ratio Analysis Co. Indus. Sector SP500
Ave. Daily Vol: 4.93 Million P/E (TTM) 12.25 22.13 15.88 20.68
Beta: 1.26 P/S (TTM) 1.36 3.98 3.53 2.96
Market Cap ($million): 85,850 P/B (MRQ) 2.56 6.21 4.24 7.19
Shares Out (million): 425.8 ROA (TTM) 1.09 5.24 2.98 8.29
Inst. Hold %: 72.4% EBO Valuation $214.92
Div Yld: .69% Recommendation: BUY
Total Debt/Equity: 6.03 Stop-loss Price: $161.28
Member S&P 500? YES Price 6-mo prob 12-mo prob
Target Price $231.84 43% 61%
Investment Thesis Summary
• Goldman Sachs has consistently beat Bearish/Neutral – With an assumed discount
analysts’ earnings expectations. With the rate of 11.36%, the company has an EBO value
company announcing their earnings on of $214.92, only 06.6% above the current price.
December 12th, 2006, getting in early could
produce an immediate payoff. Relative Valuation:
Bullish – The indicators are mostly bullish, with
• Technical analysis strongly suggests that the one neutral and one bearish, suggesting that the
price is heading up. Even though nearing the company may be undervalued. The company has
top Bollinger band, the security looks to be similar competitors, making relative valuation
riding very positive price momentum and important.
does not appear to be finished.
• When looking at value indicators, relative Bullish – Only Stochasics produced a non-
valuation is more relevant. EBO valuation is, bullish signal, and that was neutral.
by nature, input sensitive, and very
reasonable assumptions show a wide range Earnings Analysis:
of pricings for this security. The majority of Bullish – Goldman Sachs has produced positive
relative valuations suggest that Goldman earnings surprises in each of the past five
Sachs is undervalued. quarters. Analysts have also been revising their
earnings expectations upward considerably.
• Goldman Sachs makes up a very small
portion of the Financials ETF (around 2%). Analyst Recommendations:
Concentrating funds into the company could Bullish – With a mean rating staying steady at
produce substantial returns. around two, analysts have consistently projected
Goldman Sachs to outperform the market.
• Over the past year, analysts have
unwaveringly believed that Goldman Sachs
Neutral – There has been a net decrease in the
will outperform the market.
number of institutional investors, but overall
there are a greater percentage of shares owned
Goldman Sachs is a leading investment bank and offers securities and capital management services to a large
and well-diversified client base all over the world.1 Headquartered in New York City, the company is highly
recognized as an Investment Bank. This, however, is only one segment of the company’s business. The
company’s other main business sectors are Trading and Principal Investments, and Asset Management and
Securities Services. The company’s business functions utilize most every financial tool to grow markets
around the world.
While Goldman Sachs may be most known for its headline-grabbing advisory positions in orchestrating the
biggest mergers and acquisitions, divestitures, and underwriting of IPO’s in the world, it is actually the
Trading and Principal Investments segment that has produced about 75% of the company’s earnings over the
past three years. The component of this segment are as followed: 1) Fixed Income, Currency, and
Commodities; 2) Equities; and 3) Principal Investments. In the Fixed Income, Currency, and Commodities
segment, Goldman Sachs makes markets in and trades products such as mortgage-backed securities, interest-
rate swaps, and many derivative instruments pertaining to all types of commodities. As part of its
commodities business, the company has acquired a significant stake in power plants from National Energy &
Gas Transmission, Inc.2 Lastly, Principal Investments mainly consists of the net gains from the merchant
banking activities of Goldman Sachs.
The company’s last segment consists of Asset Management and Securities Services, which provides a variety
of services to many high-net-worth individuals and institutions while generating revenues in the form of
management/incentive fees and interest rate spreads.3
Pre-tax Earnings (millions)
2005 2004 2003
Investment Banking $413 $401 $207
Trading and Principal $6,218 $5,040 $3,505
Asset Management and $1,679 $1,419 $968
Total $8,273 $6,676 $4,445
Pre-tax Earnings (millions) 2005
Trading and Principal Investments
Asset Management and Securities Services
Goldman Sachs 2005 10-K report—www.goldmansachs.com
Competition and Strategy
Goldman Sachs competes with large banks such as JP Morgan Chase, Merrill Lynch, and Morgan Stanley.
These companies are largely similar in their activities, and perform many of the same functions per the theory
of efficient markets. There are some exceptions, however, in the services offered and strategies utilized.
Within the investment banking divisions of each company, Goldman Sachs and its competitors will work
together to hedge risk. Tombstones announcing the successful issuance of IPO’s advertise the cooperation of
many companies that compete with each other in the Banking Industry, but work together in several areas of
In some instances, the company’s competitors specialize in areas where Goldman Sachs does not operate. JP
Morgan Chase chooses to offer a variety of card services to universities, institutions, consumers, etc. The
company has more than 110 million cards currently in circulation.4 Goldman Sachs does not choose to offer
small, individual lines of credit at all. Merrill Lynch takes a different approach to investment management
than Goldman Sachs. Merrill Lynch owns just less than half of BlackRock, one of the world’s largest
investment management firms. The company still manages investments, but has apparently chosen to rely on
BlackRock and other subsidiary firms for performance.
Goldman Sachs tries to differentiate itself mainly in the area of Trading and Principal Investments. As the
largest of the company, this segment takes aggressive growth strategies though its asset allocation. The
company believes that the diversification is good for investors, but asset allocation takes this even further.5
Goldman Sachs has countless growth projects in the works. Currently, the company is looking to profit from
what it calls the “Hispanization” of the United States. 6 The company states that Hispanics could make up
20% of the country within the next 25 years, and are trying to capitalize on the trend. This entails investing in
the ‘right’ states (Texas, California, Florida), the ‘right’ companies (Univision, 99 Cents Only Stores, Sempra
Energy), and the ‘right’ products, which the company views as Hispanic-patronized products in the
Healthcare, Housing, and Media Sectors. This is just one example of the strategies Goldman Sachs looks for
in its asset allocation. With many projects in diversified areas, the company is staying aggressive while
minimizing risk and promoting efficient markets.
There are an infinite number of investment strategies and fund ideas in the market. What makes Goldman
Sachs different from its competitors is to whom these strategies are marketed. While the company’s closest
competitors receive a considerable portion of their revenues from small businesses and low-net-worth
individuals, Goldman Sachs chooses to bypass these customers. Inefficiencies are unavoidable with practices
such as JP Morgan’s offering various lines of credit to over 25,000 customers7 and Merrill Lynch’s
securitization of relatively small, multi-family mortgages. Morgan Stanley has over 485 retail locations in the
United States alone8—accumulating tremendous amounts of overhead costs. Instead, Goldman Sachs
concentrates its focus on high-net-worth investors, eliminating many of the inefficiencies faced by its
competitors. The company can invest massive quantities of money while maintaining and servicing a minimal
amount of clients.
Historical Revenue and Earnings:
Historical Revenue (millions) Historical Earnings (millions)
FY 11/06 FY 11/05 FY 11/04 FY 11/06 FY 11/05 FY 11/04
1st Quarter 17,246.0 9,964.0 7,905.0 $5.36 $3.06 $2.63
2nd Quarter 18,002.2 8,949.0 7,676.0 $5.08 $1.78 $2.43
3rd Quarter 15,979.0 12,333.0 6,803.0 $3.46 $3.40 $1.80
4th Quarter NA 12,145.0 7,455.0 NA $3.54 $2.44
Total 51,227.0 43,391.0 29,839.0 $13.90 $11.78 $9.30
Historical revenues and earnings per share have both increased in each quarter over the past four years with
the exception of 2nd quarter earnings of 2005. During this period, Goldman Sachs experienced decreased
revenues in the Trading and Principal Investments segment as well as Investment Banking. While total
revenues did increase due to growth in Asset Management and Securities Services, earnings per share still
declined. The major reason for the slide was that 2004, 2nd quarter revenues were extraordinarily high due to
marked gains in the company’s investment in the convertible preferred stock of Sumitomo Mitsui Financial
Group. Also to blame for the decline was that “markets generally lacked direction, credit markets weakened,
and the US yield curve continued to flatten.”9
The steady increases in revenues and earnings are a result of the company’s increases in total assets under
management as well as the performance of the worldwide economy. Goldman Sachs sees revenue from
management fees, interest rate spreads, etc., from its managed assets. The company increased its assets under
management by $79 billion in 2004 and $80 billion in 2005. Actual figures for 2006 assets under management
will be released along with the company’s 2006 Form 10-K in February of 2007, but it is a reasonable
assumption that this trend will continue. The worldwide economy has seen steady growth over the past three
years, driving the performance of Goldman Sachs.
Goldman Sachs 2005 10Q Filing – www.goldmansachs.com
I. Fundamental Valuation
Goldman Sachs PARAMETERS FY1 FY2 Ltg
EPS Forecasts 18.52 17.55 15.81% Model 1: 12-year forecasting horizon (T=12).
Book value/share (last fye) 64.08 and a 7-year growth period.
Discount Rate 11.36%
Dividend Payout Ratio 7.09%
Next Fsc Year end 2006
Current Fsc Mth (1 to 12) 12
Target ROE (industry avg.) 16.10%
Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Long-term EPS Growth Rate (Ltg) 0.1581 0.1581 0.1581 0.1581 0.1581
Forecasted EPS 18.52 17.55 20.32 23.54 27.26 31.57 36.56
Beg. of year BV/Shr 64.080 81.287 97.593 116.476 138.345 163.672 193.003
Implied ROE 0.216 0.208 0.202 0.197 0.193 0.189
ROE (Beg. ROE, from EPS forecasts) 0.289 0.216 0.208 0.202 0.197 0.193 0.189 0.184 0.178 0.172 0.167 0.161
Abnormal ROE (ROE-r) 0.175 0.102 0.095 0.088 0.083 0.079 0.076 0.070 0.064 0.059 0.053 0.047
growth rate for B (1-k)*(ROEt-1) 0.000 0.269 0.201 0.193 0.188 0.183 0.179 0.176 0.171 0.165 0.160 0.155
Compounded growth 1.000 1.269 1.523 1.818 2.159 2.554 3.012 3.542 4.147 4.833 5.607 6.475
growth*AROE 0.175 0.130 0.144 0.161 0.180 0.202 0.228 0.248 0.267 0.284 0.298 0.307
required rate (r) 0.114 0.114 0.114 0.114 0.114 0.114 0.114 0.114 0.114 0.114 0.114 0.114 0.114
discount rate 1.114 1.240 1.381 1.538 1.713 1.907 2.124 2.365 2.634 2.933 3.266 3.637
div. payout rate (k) 0.071
Add to P/B PV(growth*AROE) 0.16 0.10 0.10 0.10 0.11 0.11 0.11 0.11 0.10 0.10 0.09 0.08
Cum P/B 1.16 1.26 1.37 1.47 1.58 1.68 1.79 1.90 2.00 2.09 2.18 2.27
beyond current yr (Assume this yr's AROE forever) 1.39 0.92 0.92 0.92 0.93 0.93 0.95 0.92 0.89 0.85 0.80 0.74
Total P/B (P/B if we stop est. this period) 2.54 2.18 2.29 2.39 2.50 2.62 2.74 2.82 2.89 2.95 2.99 3.01
Implied price 181.55 155.80 163.09 170.68 178.56 186.76 195.29 201.22 206.22 210.22 213.13 214.92
Beg. BV/Shr 64.08 81.29 97.59 116.48 138.35 163.67 193.00 226.97 265.72 309.68 359.27 414.91
Implied EPS 18.52 17.55 20.32 23.54 27.26 31.57 36.56 41.70 47.31 53.38 59.89 66.80
Implied EPS growth -0.052 0.158 0.158 0.158 0.158 0.158 0.141 0.134 0.128 0.122 0.115
1. EPS Forecasts and long-term growth rate (LTG) were obtained from www.reuters.com on
November 20, 2006.
2. Book value per share derived from the company’s annual balance sheet found on the Reuters
website. The book value of equity was listed at $28,002,000,000 and shares outstanding totaled
437,000,000. Thus, the book value per share totaled $64.08 ($28,002,000,000/437,000,000 = $64.08)
Figures were listed as of November 25, 2005.
3. Discount rate: the discount rate was found using the Capital Asset Pricing Model. The risk-free rate
was found from the Federal Reserve website. The 20-year T-bond rate was listed at 4.76% as of
November 22, 2006. Other inputs were an assumed expected return on market of 10% and a
company beta of 1.26. The company beta was listed from www.msnmoney.com. The discount rate
used was subsequently calculated as follows: [0.0476+1.26(0.10-0.0476)] =11.36.
4. Dividend payout ratio is listed on the Reuters website and is a trailing-twelve-months figure.
5. Next fiscal year-end is November 24, 2006.
6. Current fiscal month is December, 2006.
7. Target ROE for the General Finance industry is listed at 16.10% on the Reuters website.
Output and Sensitivity Analysis:
1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO
valuation is $214.92.
2. Changing the discount rate to 10.13 % would result in an EBO valuation of $266.54, a $64.94
premium over the current price. This would be achieved by taking a more conservative expected
market return of 9.5%. It would take a discount rate of 11.74% to result in the current market price
3. Changing the growth rate ± 2% from analyst expectations, the fundamental valuation of Goldman
Sachs ranges from $204.21--$226.43, both of which are above the current price.
4. Changing the industry ROE to 14.53% (5-year avg. Sector ROE), the EBO valuation results in a
security price of $190.56 for Goldman Sachs. If the ROE average of the S&P 500 (17.96%) is used,
the fundamental valuation is $245.17.
II. Relative Valuation
Earnings Estimate Forward Mean LT PEG P/B ROE Value
Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S
1 JPM JP Morgan Chase & Co. 163.98B 47.27 3.96 11.94 10.02% 1.19 1.44 7.46% 0.19 2.78
2 MER Merrill Lynch Co., Inc. 81.85B 92.59 7.18 12.90 13.35% 0.97 2.29 11.36% 0.20 1.30
3 MS Morgan Stanley 83.57B 78.95 6.80 11.61 12.66% 0.92 2.53 17.06% 0.15 1.15
4 LEH Lehman Brothers Holdings Inc. 40.59B 76.58 6.96 11.00 13.69% 0.80 2.35 17.34% 0.14 0.95
GS Goldman Sachs Group, Inc. 85.85B 201.60 17.55 11.49 15.81% 0.73 2.56 16.70% 0.15 1.36
Implied Price based on: P/E PEG P/B Value P/S
1 JPM JP Morgan Chase & Co. $209.49 $330.55 $113.40 $253.86 $412.09
2 MER Merrill Lynch Co., Inc. $226.32 $268.02 $180.34 $265.11 $192.71
3 MS Morgan Stanley $203.76 $254.46 $199.24 $195.03 $170.47
4 LEH Lehman Brothers Holdings Inc. $193.10 $223.00 $185.06 $178.23 $140.82
High $226.32 $330.55 $199.24 $265.11 $412.09
Low $193.10 $223.00 $113.40 $178.23 $140.82
Median $206.63 $261.24 $182.70 $224.45 $181.59
P/E Slightly Bullish – Goldman Sachs has a very comparable P/E ratio opposed to its
competitors as a whole. However, the company has a lower P/E than its closest
competitors (Morgan Stanley and Merrill Lynch), with a median implied price of
$206.63, just above its current price.
PEG (P/E/G) Bullish – The company has a lower PEG ratio than any of its competitors, suggesting
that it may be undervalued. A lower PEG ratio can also imply higher risk; however, this
does not appear to be the case as Goldman Sachs has a lower beta than its closest
competitors and an ROE only 0.60% over the five-year Industry average. It is notable
that the security is fairly valued according to the standards of Motley Fool.
P/B Bearish – The company has a P/B higher than its closest competitors. This suggests
that the company may be overvalued. However, the company’s high P/B could also be
due to the fact that that company’s ROE is higher than both Industry and Sector
averages, implying higher risk.
Value (P/B/ROE) Bullish – Goldman Sachs has a value ratio approximate-to or lower than its closest
competitors. This implies that the stock is undervalued. A lower value ratio can also
imply higher risk, but this does not appear to be the case for reasons specified
previously. With its value ratio of 0.15, the company has a median implied price of
$224.45, almost $23 above its current price.
P/S Neutral – The P/S of Goldman Sachs is very comparable to its closest competitors.
The company’s P/S is most similar to Merrill Lynch, with other competitors showing
great range in P/S. Few value or risk implications can be established due to the range of
Summary With a majority of the indicators being bullish, and only one neutral and one bearish
signal, relative valuation looks bullish for Goldman Sachs. The nature of the Financials
Sector results in close competition for companies such as Goldman Sachs. Therefore,
relative valuation holds a great deal of weight. The company looks to be undervalued at
III. Technical Analysis (continued)
Bollinger Bands Bullish – The top and bottom bands have become extremely wide over the past couple
months, reflecting the security’s current price volatility. Also, the price is approaching
the top band, indicating that it is poised for a move. With most all other technical
indicators looking bullish, it appears that the security price may about to push upward
still. The chart shows more than one instance in the past year in which the security
price has approached the top band and kept going.
Stochastics Neutral – %K (92.44) is above %D (84.86), which is a positive indicator. However, the
fact that %K is above 80% and the gap between the two lines is dissipating means that
there is a possible “overbought” scenario. While Dr. George Lane places a greater
emphasis on the convergence/divergence of the lines, the conflicting negative/positive
indicators look to be a neutral signal.
Moving Averages Bullish – The current security price is above both the 25 and 50-day moving averages.
In addition, the moving averages are heading in an upward direction, clearly a bullish
MACD Bullish – With the MACD greater than zero and above the signal line, Goldman Sachs
looks to be a bullish security.
Regression Bullish – The linear regression line has a pronounced positive slope, a positive signal.
Also, the current price is above the signal line, a bullish indicator.
PriceROC Bullish – The price momentum indicator is greater than zero with a clear positive slope
since September, 2006. This is a bullish signal for the security.
IV. Earnings Analysis
Aug 2006 May 2006 Feb 2006 Nov 2005 Aug 2005
(Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior)
Estimate 2.98 4.29 3.30 3.32 2.33
Actual 3.26 4.78 5.08 3.35 3.25
Difference 0.28 0.49 1.78 0.03 0.92
Mean Earnings Estimates
Nov 2006 Feb 2007 Nov 2006 Nov 2007 LT Growth
This Quarter Next Quarter This Fiscal Year Next Fiscal Year Rate
Earnings 5.49 4.82 18.52 17.55 15.81
# Estimates 17 6 19 20 9
Earnings Per Share Estimates Revisions Summary
Last Week Last 4 Weeks
Revised Up Revised Down Revised Up Revised Down
Quarter ending 11/06 2 0 10 0
Quarter ending 02/07 2 0 3 0
Year ending 11/06 2 0 10 0
Year ending 11/07 2 0 7 0
Goldman Sachs has produced positive earnings surprises for each of the last five quarters. On average, the
company produces $0.70/share in earnings surprises during this period. This is clearly a bullish indicator.
Also, Goldman Sachs is planning to announce its annual and fourth quarter earnings for 2006 on December
12th. If the company continues its current trend of producing positive earnings surprises, then now would
definitely be a good time to buy.
The company is expected to produce $5.49 in earnings per share. This is cause for attention. During the same
quarter one year previous, Goldman Sachs was only expected to produce $3.32 per share, and in fact only
beat that estimate by $0.03. Analysts may have realized that they have continuously underestimated the
earnings of this company and changed their methods. Though, it may be possible that the company is just
expected to have a very solid quarter. It is notable that 2007 earnings are expected to be lower than the
earnings of 2006. This may change when Goldman Sachs produces its 2006 10-K report.
When looking at both the next two quarters and the next two fiscal years, analysts have overwhelmingly
revised their earnings per share estimates upward over the past four weeks. With no downward revisions in
the past month, Goldman Sachs looks bullish.
V. Analysts’ Recommendations
Current 1 Month Ago 2 Months Ago 1 Year Ago
Buy 7 7 7 8
Outperform 8 7 7 8
Hold 7 7 7 6
Underperform 0 0 0 0
Sell 0 0 0 0
No Opinion 0 0 0 1
Mean Rating 1.95 2.00 2.00 1.91
Analysts’ recommendations have been stable for the past year. With a mean rating holding steady at around 2,
analysts expect Goldman Sachs to outperform the market. This is a positive indicator for the stock. The
current mean rating has decreased from the past two months, usually a bullish indicator; however, a .05
improvement is not overwhelming. Compared to a year ago, the company has seen an increased mean rating.
Again, though, only a .04 movement is no cause for concern.
VI. Institutional Ownership
# of Holders % Beg. Holders Shares % Shares
Shares Outstanding 425,811,890 100.00%
Total Positions 899 98.68% 308,287,808 72.40%
New Positions 98 10.76% 6,509,938 1.53%
Soldout Positions 62 6.81% -2,872,661 -0.67%
Buyers 431 47.31% 27,888,422 6.55%
Sellers 443 48.63% -22,048,906 -5.18%
Beg. Total Inst. Positions 911 100.00% 302,448,292 71.03%
# Net Buyers/3 Mo. Net
Chg. -12 -1.32% 5,839,516 1.37%
Overall, institutional ownership analysis produces a neutral signal for the stock. While there has been twelve
more sellers than buyers (a bearish signal), there has also been a 1.37% increase in shares owned by
institutions. The latter is a bullish indicator. With a decrease in the number of institutional owners and a total
overall increase in institutional ownership percentage, no clear signal of performance can be established.