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Goldman Sachs 3 Document Transcript

  • 1. Goldman Sachs (GS) Anton A. Krivenyshev Date: October 7, 2008 Consensus Estimate 9/07A 12/08E 12/09E Sector: Financials EPS $16.64 $12.48 $13.86 Industry: Investment Banking P/E 7.91 10.54 9.49 Current Price: 115.00 Long Term Growth Rate: 18.00% 52 Wk Price Range: $85.88 - 250.70 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 22,923,542 P/E (TTM) 8.15 2.03 N/M 17.93 Beta: 1.554 P/S (TTM) 0.73 3.50 N/M 2.29 Market Cap ($million): 51,801 P/B (MRQ) N/A 1.54 N/M 6.84 Shares Out (million): 393.80 ROA (TTM) N/A -0.23 N/M 8.05 Inst. Hold %: 70 EBO Valuation $126.96 Div Yld: 1.08 Recommendation: BUY Total Debt/Equity: 4.14 Stop-loss Price: 95.00 Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price 145.00 60% 66% Investment Thesis Summary Fundamental Valuation: Although the current financial crisis has adversely Neutral – EBO valuation at a Discount rate of affected revenue and earnings, the company is seen 11.55% gives the stock a $126.96 price value. by many as one of the few investment banks that anticipated the mortgage meltdown and positioned Relative Valuation: itself favorably. Bullish – All but one indicator yielded a bullish sign, suggesting that the company is undervalued Warren Buffet invested $5 billion into Goldman or may be a higher investment risk. Sachs by buying its preferred stock as well as receiving the option to buy $5 billion more common Technical Analysis: stock at $115.00 over the next 3 years. To many this Bearish - Nearly all indicators were bearish but is seen as a bullish sign and people feel safe investing one. This is because the stock has been in a in a stock that Buffet backs because of his ability to strong trend downwards all year. inject vast amounts of capital if needed. Earnings Analysis: Relative valuation yielded a bullish signal meaning Bullish – The company has done well by that compared to its peers, Goldman Sachs is a better delivering consistent earnings surprises over the investment choice, especially when comparing it to past 5 quarters and with most analysts revising the Financial ETF (XLF). earnings estimates up over the last several weeks. Many analysts predict that once the financial crisis is Analyst Recommendations: over, many smaller banks will be gone and a new era Slightly Bullish – Analysts have slowly of “super banks” will emerge. Goldman Sachs is one downgraded the company, however with a mean of the few banks that have survived and many rating of 2.82, most analysts are keeping it at a customers of other leading banks that went under Hold or Outperform rating with only one sell. will bring their business to Goldman, therefore raising its market share. Institutional Ownership: Neutral - Institutional ownership based on Goldman Sachs currently only makes up 3.21% of number of shares has only changed (0.6%) IYF, the financial index we hold, and I think that by signaling that although there is a financial crisis, upping our holdings of this particular company we institutions have continued to stay invested in will see less downside and more upside potential than the company. with the ETF. 1
  • 2. Company Summary Goldman Sachs is one of the largest global full-service investment bank and securities firm in the world. The company was founded in 1869 by Marcus Goldman, headquartered in New York City, the company then quickly made a name for itself by popularizing the use of commercial paper for entrepreneurs1. Since then, Goldman Sachs has become a powerhouse in the investment banking sector, know for attracting the top talent from all around the world from top universities and usually leading the underwriting process for history’s largest IPOs. Today, Goldman Sachs provides a wide range of services to many of its clients which include corporations, financial institutions, governments, and high net worth individuals worldwide2. The company’s activities are divided into 3 segments which include: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services. The investment Banking segment of the companies’ business includes 2 divisions, Financial Advisory and Underwriting. The Financial Advisory segment is responsible for mergers and acquisitions, company restructurings, and spinoffs. The Underwriting portion is responsible for taking companies public and other tools for companies to create equity through the use of complicated debt instruments. In 2007, the Investment Banking segment provided $7,555 million in net revenues3. Next is its Trading and Principal Investments segment which accounted for $31,226 million of the company’s net revenue for 2007. This segment is divided into 3 divisions which include: 1) Fixed Income, Currency, and Commodities 2) Equities 3) Principal Investments Goldman Sachs makes most of its money through these types of trading from the bid-ask spread by acting as the market maker as well as doing its own proprietary trading and making bets in the stock, future, and option markets4. The last segment of Goldman Sachs is its Asset Management and Securities Services. It provides investment advisory and financial planning services to institutions, hedge funds and high-net- worth individuals worldwide. This contributed $7,206 million to the company’s net revenue for 20075. Competition and Strategy 1 http://www.businessweek.com/1997/51/b3558118.htm 2 www2.goldmansachs.com 3 www2.goldmansachs.com 4 www2.goldmansachs.com 5 www2.goldmansachs.com 2
  • 3. Goldman Sachs’s main competitors in its sector include JP Morgan, Merrill Lynch, Morgan Stanley, Citigroup, and many others. However because of the current financial crisis going on, many of the financial institutions are doing very poorly right now. Some of Goldman Sachs competitors have disappeared only in the last year because of this crisis which includes Bear Stearns and Lehman Brothers. Others are being bought out such as Merrill Lynch which is now owned by Bank of America, and Washington Mutual who is now owned by JP Morgan. Historically Goldman Sachs has continued to stay above its competition through the genius that it requires of its employees. Back in the early 1900s, Goldman was one of the first companies to actively recruit graduates from top MBA programs around the country. By doing this, Goldman has ensured that it employs the top minds in mathematics and finance in the world in order to do everything from managing risk effectively to underwriting IPOs to engineering complex debt instruments for its customers. One example of the genius in Goldman Sachs employees includes two traders who made a very profitable bet in 2007, $4 billion to be exact. Josh Birnbaum and Michael Swenson were two traders that realized what was going on in the subprime market and therefore pushed senior management to approve of their trading strategy to short the subprime mortgage market6. It is because of these two that Goldman Sachs escaped the subprime mortgage crisis, actually making money. Because of the financial crisis going on, many banks are going through a large transformation using mergers, acquisitions, or just changing their structure to adjust to the new regulations that will be placed upon financial institutions once we are out of this crisis. On September 22, 2008, Morgan Stanley and Goldman Sachs received federal approval to become bank holding companies7. The two decided to switch to be supervised under the Federal Reserve in order to have access to Federal Bank Reserve Discount window and therefore more opportunities for funding. With this transformation and its planned acquisitions to grow its assets from $20 to $150 billion, Goldman Sachs will become the fourth largest bank holding company in the United Sates, following Bank of America, JP Morgan, and Citigroup8. 6 http://www.telegraph.co.uk/finance/markets/2821324/Goldman%27s-traders%2C-not-bosses%2C-deserve- credit.html 7 http://www.bizjournals.com/albany/stories/2008/09/22/daily2.html 8 http://www.bizjournals.com/albany/stories/2008/09/22/daily2.html 3
  • 4. Historical Revenue and Earnings: Historical Revenue ($mil) Historical Earnings ($) FY 11/08 FY 11/07 FY 11/06 FY 11/08 FY 11/07 FY 11/06 1st Quarter 18,629.0 22,280.0 17,246.0 3.23 6.67 5.08 2nd Quarter 17,643.0 20,351.0 18,002.0 4.58 4.93 4.78 3rd Quarter 13,625.0 23,803.0 15,979.0 1.81 6.13 3.26 4th Quarter 6,859.9 E 21,534.0 18,126.0 2.88 E 7.01 6.59 Total 30,712.3 E 87,968.0 69,353.0 12.48 E 24.73 19.69 Historical Revenues and earnings growth has consistently grown over the past 5 years with the exception of the current year. The decrease in revenue and earnings for 2008 is because of the financial crisis and subprime meltdown that our economy is currently going through. After 3rd Quarter results were made public, Lloyd Blankfein, the Chairman and CEO said, “This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations.”9 Even though earnings were cut in half for 2008, I think this has been fully accounted for in the price of the stock, and historical and future revenue shows a bullish pattern for growth. 9 http://www2.goldmansachs.com/our-firm/press/press-releases/current/pdfs/2008-q3-earnings.pdf 4
  • 5. I. Fundamental Valuation Goldman Sachs PARAMETERS FY1 FY2 Ltg EPS Forecasts 12.48 13.86 18.00% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 109.55 and a 7-year growth period. Discount Rate 11.55% Dividend Payout Ratio 8.41% Next Fsc Year end 2008 Current Fsc Mth (1 to 12) 10 Target ROE (industry avg.) 10.65% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Long-term EPS Growth Rate (Ltg) 0.1800 0.1800 0.1800 0.1800 0.1800 Forecasted EPS 12.48 13.86 16.35 19.30 22.77 26.87 31.71 109.55 120.98 133.67 148.65 166.33 187.18 211.79 Beg. of year BV/Shr 0 0 5 4 0 7 9 Implied ROE 0.115 0.122 0.130 0.137 0.144 0.150 ROE (Beg. ROE, from EPS forecasts) 0.114 0.115 0.122 0.130 0.137 0.144 0.150 0.141 0.132 0.124 0 Abnormal ROE (ROE-r) -0.002 -0.001 0.007 0.014 0.021 0.028 0.034 0.026 0.017 0.008 0 growth rate for B (1-k)*(ROEt-1) 0.000 0.104 0.105 0.112 0.119 0.125 0.131 0.137 0.129 0.121 0 Compounded growth 1.000 1.104 1.220 1.357 1.518 1.709 1.933 2.198 2.482 2.784 3 growth*AROE -0.002 -0.001 0.008 0.019 0.033 0.048 0.066 0.056 0.042 0.023 -0 required rate (r) 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0 discount rate 1.116 1.244 1.388 1.548 1.727 1.927 2.149 2.397 2.674 2.983 3 div. payout rate (k) 0.084 Add to P/B PV(growth*AROE) 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.02 0.02 0.01 Cum P/B 1.00 1.00 1.00 1.02 1.04 1.06 1.09 1.11 1.13 1.14 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) -0.01 -0.01 0.05 0.11 0.16 0.22 0.27 0.20 0.14 0.07 Total P/B (P/B if we stop est. this period) 0.99 0.99 1.06 1.12 1.20 1.28 1.36 1.32 1.27 1.20 158.1 Implied price 118.45 118.96 126.81 135.11 143.89 153.17 163.00 9 152.04 144.67 13 Check: 240.8 Beg. BV/Shr 109.55 120.98 133.67 148.65 166.33 187.19 211.80 4 271.96 304.94 33 Implied EPS 12.48 13.86 16.35 19.30 22.77 26.87 31.71 33.97 36.01 37.75 3 Implied EPS growth 0.111 0.180 0.180 0.180 0.180 0.180 0.071 0.060 0.048 0 Inputs: 1. EPS forecasts and the long-term growth rate were taken from Reuters.com as of 10/05/2008. 2. Book value per share was obtained by taking Total Equity/Total Common Shares Outstanding for the 2007 fiscal year ending (=42,800/390.68) and numbers were taken from Reuters.com. 3. Discount rate: CAPM method was used to find the discount rate. 20 year t-bond rate is assumed to be the risk free rate at 4.44%, expected market return is assumed at 9%, and a company beta of 1.554. Using the CAPM method, a discount rate of 11.55% is found: =0.044+1.554*(0.09-0.044) 4. Dividend payout ratio was derived by dividing TTM Dividends per share/EPS from Reuters.com. 5. Next fiscal year-end is 2008 6. Current fiscal month is 10, October. 7. Target ROE is 10.65% which was obtained from Reuters.com. Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $126.96. 2. Changing the discount rate to 11.50% (-0.05%) yields an EBO valuation at $128.00 which is exactly the price that GS currently (10/05/2008) trades at. 5
  • 6. 3. Changing the growth rate to 25.00% (+7.00%), the EBO valuation yields a price of $148.47. 4. Changing the industry ROE to 15.00% (+4.35%), the EBO valuation yields a price of $186.22. 6
  • 7. II. Relative Valuation Comparables Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Ticke r Name Mkt Cap ($Bil) Current Price ($) (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio 1 JPM JP Morgan Chase & Co. 157.76 45.90 3.25 14.12 9.00% 1.57 1.35 10.56% 0.13 2 MER Merrill Lynch Co., Inc. 40.84 26.67 2.52 10.58 3.67% 2.88 1.28 7.12% 0.18 3 MS Morgan Stanley 26.53 23.92 4.76 5.03 12.50% 0.40 1.00 15.40% 0.06 4 C Citigroup Inc. 99.92 18.35 1.96 9.36 10.33% 0.91 1.12 14.49% 0.08 GS Goldman Sachs Group, Inc. 54.78 128.00 13.86 9.24 18.00% 0.51 1.17 25.16% 0.05 Implied Price based on: P/E PEG P/B Value 1 JPM JP Morgan Chase & Co. $195.75 $391.49 $144.00 $343.09 2 MER Merrill Lynch Co., Inc. $146.69 $719.44 $136.53 $482.47 3 MS Morgan Stanley $69.65 $100.30 $106.67 $174.27 4 C Citigroup Inc. $129.76 $226.11 $119.47 $207.44 High $195.75 $719.44 $144.00 $482.47 Low $69.65 $100.30 $106.67 $174.27 Median $138.22 $308.80 $128.00 $275.26 Indicator Interpretation P/E Bullish – Goldman Sachs has a lower forward P/E ratio than most of its competitors signaling that the company is undervalued based on projected future earnings. PEG (P/E/G) Bullish – The company has a lower PEG ratio than most of its competitors indicating it is either undervalued or has higher risk. P/B Neutral – The company has the median P/B ratio between all its major competitors. Value (P/B/ROE) Very Bullish – Comparing the company to its competitors, it has the lowest value ratio indicating that it is either severely undervalued or has higher risk. P/S Bullish – Goldman Sachs P/S ratio is lower than most of its competitors indicating that the stock is undervalued. Summary Based on the company’s evaluation against its peers, most indicators paint a bullish picture for Goldman Sachs. I believe that Goldman Sachs is undervalued and is much less risky than its competitors because, unlike its competitors, Goldman Sachs is still profitable. It was also able to avoid most of the subprime mortgage meltdown crisis by selling subprime bonds short which helps make it a safer long term investment without the fear of the company going under. 7
  • 8. III. Technical Analysis Chart 1: Bollinger Bands Slow Stochastics Chart 2: Exponential Moving Average (EMA) MACD 8
  • 9. Chart 3: Linear Regression Momentum Indicator Interpretation Bollinger Bands Bearish – The stock is moving close towards the bottom band which could indicate that it is headed lower, however it could also be poised for a pop once it touches the bottom Bollinger band. Stochastics Neutral – While K% is slightly above D% indicating a bullish signal, the K% is heading down while D% is on its way up, which coupled with the current volatility in the market, indicates that this could change very fast to a bearish signal. Moving Averages Bearish – The stock is trading below both the 25 and 50-day moving averages. MACD Bearish – The MACD is currently <0 and below the EMA signal line indicating a bearish signal. Regression Bearish – The linear regression line is on a down slope indicating a bearish signal. Momentum Bearish – Momentum is currently under 100 which indicates another bearish signal. 9
  • 10. IV. Earnings Analysis Earnings Surprises 05/08 02/08 11/07 08/07 05/07 (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate 3.41 2.57 6.68 4.35 4.37 Actual 4.58 3.23 7.01 6.13 4.93 Difference 1.16 0.66 0.33 1.78 0.14 Mean Earnings Estimates 11/08 02/09 11/08 Date: 11/09 LT Growth This Quarter Next Quarter This Fiscal Year Next Fiscal Rate Year Earnings 3.94 4.32 13.71 17.10 18.00 # Estimates 17 6 22 22 6 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Down Revised Up Revised Down Quarter ending 11/08 0 0 7 5 Quarter ending 02/09 0 0 3 2 Year ending 11/08 0 0 19 0 Year ending 11/09 0 0 6 4 Goldman Sachs has beaten analysts’ expectations and given investors positive earnings surprises for each of the last 5 quarters which is a very bullish indicator for the company. One reason for this is because analysts continue to group Goldman Sachs with its competitors in terms of performance; yet Goldman has been very skilled at handling risk being on the right side of the market and therefore continues to outperform its competitors and produce positive earnings surprises. Another positive for the company is that for the last 4 weeks, most analysts have been revising earnings estimates upwards indicating a bullish signal. 10
  • 11. V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago Buy 4 5 4 5 Outperform 4 3 3 3 Hold 13 11 13 11 Underperform 0 0 0 0 Sell 1 1 0 1 No Opinion 0 0 0 0 Mean Rating 2.82 2.82 2.55 2.45 Analysts’ recommendations have changed little in the last 3 months with a current rating of 2.82, indicating a Hold-Outperform rating on the stock which is a slightly bullish indicator. When compared to many of its peers in the financial sector, Goldman Sachs receives a better rating indicating relative strength which could be considered a bullish signal. 11
  • 12. VI. Institutional Ownership # of Holders % Beg. Holders Shares % Shares Shares Outstanding 394,026,745 100.00% Total Positions 985 79.69% 269,908,320 68.50% New Positions N/A N/A Soldout Positions 251 20.31% Buyers 488 39.48% 32,240,952 8.18% Sellers 739 59.79% -32,886,206 -8.35% Beg. Total Inst. Positions 1,236 100.00% 270,553,574 68.66% #Buyers - #Sellers -251 39.77% -645,254 -0.16% Although the number of Sellers is much greater than Buyers, the number of shares between the two is almost the same, therefore only affecting the shares by (0.16%). The greater number of sellers than buyers is most likely due to the financial crisis grappling our economy and not so much the company itself. Therefore, the institutional ownership analysis for Goldman Sachs produces a neutral signal for the stock. 12