Goldman Sachs Group (GS :NYSE) Joed Ngaruiya
Date: 11/17/09 Consensus Estimate 09/09A 12/09E 12/10E
Sector: Financial EPS 19.07 19.19 18.27
Industry: General Finance P/E 8.6 8.55 8.98
Current Price: 164.16 Long Term Growth Rate: 18.75
52 Wk Price Range: $47.41-$193.60 Ratio Analysis Co. Indus. Sector SP500
Ave. Daily Vol: 8.7M P/E (TTM) 19.07 7.70 19.509 119.43
Beta: 1.39 P/S (TTM) 1.89 1.98 2.71 2.03
Market Cap: 90.8B P/B (MRQ) 1.56 1.14 1.21 2.54
Shares Out: 514.1M ROA (TTM) N/A -0.76 0.06 3.63
Inst. Ownership %: 82.01% EBO Valuation $180.06
Div Yld: 1.40 Recommendation: Buy
Debt/Equity: Stop-loss Price: $135.00
Member S&P 500? No Price 6-mo prob 12-mo prob
Target Price $184.00
Investment Thesis Summary
• Goldman Sachs is well connected in the Bullish: The EBO valuation showed that the security
highest places of government, high wealth was undervalued at $164.16. Changes of 2% in the
institutions and power brokers and they use discount rate and 3% in the ROE did result in large
that knowledge to their advantage. swing in the securities value showing that it could be
• Well known for the high grade of human
capital, Goldman Sachs has one of the best Relative Valuation:
groups of employees working for it in the Bullish/Neutral: When compared to competitors
world. indications showed primarily bullish and neutral
signals and bullish signals in the forward P/E and
• The EBO valuation shows that Goldman PEG.
Sachs is undervalued and this could lead to
stock price growth in the future. Technical Analysis:
Neutral: The moving average, Bollinger bands
• Goldman Sachs has been outperforming the all showed bearish signals. While there was still
sector ETF by nearly ten percent over the neutral to positive momentum and a bullish
last 8 months. regression indication.
• Goldman Sachs has invested 500 million in Earnings Analysis:
the launch the 10,000 Small businesses Bullish: There have been earnings surprises in 4
Initiative this new program has been signed out of 5 of the last quarters and the earnings
off on by Warren Buffett. estimates have been revised up 3 times more
• Since Goldman Sachs did not receive TARP
funds or any assistance from the Analyst Recommendations:
government they have been able to have Bullish: The mean recommendation was 1.74
more financial freedom unlike some of their and it has been declining over the last three
months most analyst recommended either buy
Goldman Sachs Group Inc. is a leading global financial services firm that provides
investment banking along with securities and investment management to a well-diversified client
base. These clients consist of governments, corporations, high net wealth individuals and other
financial institutions. Goldman Sachs was founded in 1869 and is head quartered in New York City.
The company is held in high regard for the way they have handled their investment banking
transactions and mergers and acquisitions, but there are other revenue streams such as trading and
principle investments, asset management and securities services that have also been profitable.
Over the last three years the majority of earnings have come from trade and principle. This
is an area where Goldman Sachs thrives as a leader in the industry. In principle and trade the
company takes their own capital and makes bets and takes positions. An example of this was during
the financial crisis the company made profits from their position on credit default swaps with AIG.
In a sense the company acts as a mutli-hedge fund manager and does proprietary trading and trades
with individuals in an aggressive effort to dominate the market. In 2008 due the economic crisis the
trading and principle revenues were negative but this should only be temporary as this division has
in the past accounted for nearly 70 to 75% of revenues for the company. The Banking and
investment division is where Goldman Sachs raises capital, trades securities and manages corporate
mergers and acquisition, the clients in these transactions are governments and other companies. This
division normally accounts for about 15% of the company’s revenues. Finally asset management and
securities services is a division that manages the capital assets and fixed incomes of high wealth
individuals, institutions and governments accounts for about 12% of revenues.
Pre-Tax Earnings (Millions)
2008 2007 2006
Investment Banking 2,042 2,570 1,567
Trading and Principle (2,745) 13,228 10,600
Asset Management and 3,035 1,843 2,438
Total Revenues 2,336 17,604 14,560
Goldman Sachs 10-K report
Competition and Strategy
Goldman Sachs business strategy is based on their company principles to provide superior
returns for shareholders and provide clients with superior services. One of the ways Goldman Sachs
provides these services is by recruiting the best person available for the job. The firm exudes
unusually high effort when it comes to human capital and finding the best person for each job that
becomes available. The employees are held to a high standard and are expected to be innovative and
creative enough to expound upon the financing standards and to create and pioneer tomorrow’s
new products solutions and standards of excellence. This leads to a higher and more intense work
ethic, which Goldman prides itself on having, and having it being higher than its competitors.
Goldman believes their clients come first because if there are no clients then there is no
company. Building strong client relationships is considered the base of the firm strategy. Retaining
and creating new and stronger client relationships enriches the company and allows it go and move
forward in the future. With Goldman Sachs client first attitude it and highly demanded staff they set
out to give the best service and highest returns on their product that they can possibly obtain. At
Goldman Sachs their reputation and prestige are held in high regard. Across the world Goldman
Sachs is known for the way they have conducted themselves and their handlings of client’s affairs.
Along with those tools Goldman also worked hard to create relationships with those who
are the major power brokers in the world. Since Goldman Sachs does position itself to take large
financial risks and make risky bets the company does the its do diligence in making strategic
connects and relationships to have the knowledge that no one else has. These relationships span
from large capital holding individuals to the largest power brokers in Washington D.C. In the world
of finance knowledge is everything and knowing more than your competitors and knowing before
your competitor can be a very strong competitive advantage.
Goldman belongs to what has been called the “bulge bracket” this is a term that is used to
describe the largest and most profitable investment banks and the world. To be in this group you
must be very prestigious and powerful. Companies that belong to this prestigious group are
Citigroup, Credit Suisse, Deutsche Bank, J.P Morgan, Merrill Lynch Morgan Stanley and UBS.
These companies compete in markets such as advisory and financial banking services, sales, research
and many other financial products such as insurances, mortgage backed securities, credit default
swaps and carbon emission trading. These company’s all vie to be the best company and the
competition is fierce. A key element that separates Goldman from the other competitors is the
boldness and strength of Goldman Sachs in the principle and trading division. On many of the bulge
bracket companies revenue sheet principle and trading is not where they make a high percentage of
their money. Since Goldman Sachs is a leader in principle and trading investments and this division
is where they make a substantial amount of their money this provides Goldman Sachs with a
substantial competitive advantage. Even though there is such fierce competition amongst the firms
Goldman Sachs has the capabilities and the strategy to do better than their competition. Their name
alone is synonymous with excellence their research relationships and power is extraordinary and
their human capital is outstanding.
Wikipedia, the free encyclopedia
Historical Revenue and Earnings:
Historical Revenue Historical Earnings
FY 12/09 FY 12/08 FY 12/09 FY YY/MM
1st Quarter 11,880 3,682 1,814 -2,121
2nd Quarter 15,189 3,435
3rd Quarter 13,682 3,188
All the information on historical earnings and revenues was not available. The information provided showed
that since the economic crisis Goldman has rebounded and has had positive earnings and revenues over the
last three quarters.
I. Fundamental Valuation
Go ldman Sachs PARAMET ERS FY1 FY2 Ltg
EPS Fo re casts 19.19 18.27 18.75% Mo de l 1: 12-y e ar fo re c asting ho riz o n (T =12).
B o o k v alue / share (last fy e ) 142.47 and a 7-y e ar g ro wth pe rio d.
D isco unt Rate 10.87%
D iv ide nd Pay o ut Ratio 6.12%
N e x t Fsc Ye ar e nd 2009
Curre nt Fsc Mth (1 to 12) 12
T arg e t ROE (industry av g .) 10.00%
Ye ar 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Long-te rm EPS Growth Rate (Ltg) 0.1875 0.1875 0.1875 0.1875 0.1875
Forecaste d EPS 19.19 18.27 21.70 25.76 30.59 36.33 43.14
Beg. of year BV/Shr 142.470 160.486 177.639 198.007 222.195 250.918 285.026
Implie d ROE 0.114 0.122 0.130 0.138 0.145 0.151
ROE (Beg. ROE, from EPS forecasts) 0.135 0.114 0.122 0.130 0.138 0.145 0.151 0.141 0.131 0.121 0.110 0.100
Abnormal ROE (ROE-r) 0.026 0.005 0.013 0.021 0.029 0.036 0.043 0.032 0.022 0.012 0.002 -0.009
growth rate for B (1-k)*(ROEt-1) 0.000 0.126 0.107 0.115 0.122 0.129 0.136 0.142 0.132 0.123 0.113 0.104
Compounded growth 1.000 1.126 1.247 1.390 1.560 1.761 2.001 2.285 2.588 2.905 3.234 3.569
g ro wth* AROE 0.026 0.006 0.017 0.030 0.045 0.064 0.085 0.074 0.057 0.034 0.005 -0.031
require d rate (r) 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109
discount rate 1.109 1.229 1.363 1.511 1.675 1.857 2.059 2.283 2.531 2.806 3.111 3.450
div. payout rate (k) 0.061
Add to P/B PV(growth*AROE) 0.02 0.00 0.01 0.02 0.03 0.03 0.04 0.03 0.02 0.01 0.00 -0.01
Cum P/B 1.02 1.03 1.04 1.06 1.09 1.12 1.16 1.20 1.22 1.23 1.23 1.22
Add: Pe rpetuity
beyond current yr (Assume this yr's AROE fore ver) 0.22 0.04 0.11 0.18 0.25 0.31 0.38 0.30 0.21 0.11 0.02 -0.08
Total P/B (P/B if we stop est. this period) 1.24 1.07 1.15 1.24 1.34 1.44 1.54 1.49 1.43 1.34 1.25 1.14
Implie d price 195.73 169.25 182.20 196.08 210.94 226.86 243.91 235.90 225.22 212.12 196.94 180.06
Beg. BV/Shr 142.47 160.49 177.64 198.01 222.19 250.92 285.03 325.53 368.65 413.93 460.77 508.47
Implied EPS 19.19 18.27 21.70 25.76 30.59 36.33 43.14 45.93 48.23 49.90 50.81 50.85
Implied EPS growth -0.048 0.188 0.188 0.188 0.188 0.188 0.065 0.050 0.035 0.018 0.001
1. EPS Forecasts and long-term growth rate (LTG) are from Reuters (12/1/09)
2. Book value per share derived from Reuters (12/1/09)
3. Discount rate: used a 20yr t-bond rate of 4.20% for the risk free rate and a expected return
on the market of 9% and Goldman Sachs beta is estimated at 1.39(Reuters). The CAPM
formula showed that the discount rate should be 10.87%
4. Dividend payout ratio is 6.12% and this is from Reuters (12/1/09)
5. Next fiscal year-end is 2009
6. Current fiscal month is 12 (December)
7. Target ROE= 10% the was an estimate (Sias)
Output and Sensitivity Analysis:
1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the
EBO valuation is $180.06
2. The original discount rate of the security was 10.87% when this rate was changed to 8.87%
the security value rose to $259.76 and when the rate was changed to 12.87% the value
dropped down to $129.96. This shows that the value of the security is highly sensitive to a 2
percentage point change in the discount rate.
3. When the growth rate was changed from 18.75% to 12.75% the security dropped from
$180.06 to $159.02 (12% change) and when the amount was raised to 24.75 the value went
up14% to $206.05 this shows that a 5% change in the growth can have an effect on the
value, but the security is not as sensitive to the growth rate as it is to the discount rate.
4. The ROE of the security was 10% when this percentage is changed to 7% the value dropped
to $123.61 and when it was revised up to 13% the value changed to 241.89. this show that a
3% swing in the ROE can cause a big swing in the security value.
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
UBS UBS AG 56.9B 16.00 1.48 10.81 16.10% 0.67 1.39 0.84% 1.65 3.46
C Citigroup Inc. 93.7B 4.10 0.07 58.57 3.25% 18.02 0.67 4.71% 0.14 1.17
JPM JPMorgan Chase & Co 166.4B 42.22 3.28 12.87 10.80% 1.19 1.09 8.22% 0.13 1.77
MS Morgan Stanley 42.8B 31.52 3.35 9.41 11.80% 0.80 1.17 10.00% 0.12 2.17
GS Goldman Sachs 86.2B 167.63 18.27 9.18 12.00% 0.76 1.49 10.00% 0.15 1.89
Implied Price based on: P/E PEG P/B Value P/S
UBS UBS AG $197.51 $147.22 $156.38 $1,861.66 $306.88
C Citigroup Inc. $1,070.10 $3,951.14 $75.38 $160.04 $103.77
JPM JPMorgan Chase & Co $235.17 $261.30 $122.63 $149.18 $156.99
MS Morgan Stanley $171.90 $174.82 $131.63 $131.63 $192.46
High $1,070.10 $3,951.14 $156.38 $1,861.66 $306.88
Low $171.90 $147.22 $75.38 $131.63 $103.77
Median $216.34 $218.06 $127.13 $154.61 $174.73
P/E Bullish: Goldman Sachs has the lowest P/E ratio of all his competitors this
shows that the company is undervalued and has future earning potential.
PEG (P/E/G) Bullish: Goldman Sachs has the second lowest PEG ratio of the competitors
this can show that the company is undervalued or has more risk.
P/B Bearish/Neutral: Goldman Sachs has the highest P/B ratio but the ratio of all
competitors which is a bearish signal or have high growth.
Value (P/B/ROE) Neutral: Goldman Sachs slightly above the rest of the competitors but running
close to average with them.
P/S Neutral/Bullish: Goldman Sachs is in the middle of the competitors but it is
closer to the lower ones then the top.
Summary The Forward P/E ratio and PEG gave off bullish signals, since Goldman Sachs
can be looked at as a growth stock the P/B is higher than the other
competitors. When looking at the indicators a whole the relative valuation
shows that when compared to the competition Goldman Sachs is slightly
Bullish and a growing.
III. Technical Analysis
Chart 1: Bollinger Bands
Chart 2: Exponential Moving Average (EMA)
Chart 3: Linear Regression
Bollinger Bands Bearish: The security price has been trending downwards and is currently at the
lower limit. The SMA is also above the security which is a bearish signal.
Stochastics Bearish/Neutral: The %K line and the %D line have both trended down and
but they are both moving closely together.
Moving Averages Bearish: The current price of the security is below both the 25 and 50 day
EMA’s. Also the moving averages seem to have peeked and are flattening out
and could be moving downward.
MACD Bearish: The MACD is negative and decreasing. The price has gone below the
EMA, which is a bearish signal.
Regression Bullish: The regression line is trending up but the stock price has dipped and is
20 dollars under the regression line this is a bullish signal and shows that the
stock could be rising soon in the future.
Momentum Bearish/Neutral: the momentum for Goldman Sachs has gone down slowly and
consistently over the last hundred days but it is still above 100 so it the stock is
giving of a bullish neutral signal.
IV. Earnings Analysis
Date: Date: Date: Date: Date:
(09/09) (06/09) (03/09) (11/08) (08/08)
Estimate 4.20 3.49 1.50 -3.73 1.75
Actual 5.25 4.93 3.39 -4.97 1.81
Difference 1.05 1.44 1.89 -1.24 0.06
Mean Earnings Estimates
Date: 12/09 Date: 03/10 Date: 12/09 Date: Next LT Growth
# Estimates 20 7 22 23 6%
Earnings Per Share Estimates Revisions Summary
Last Week Last 4 Weeks
Revised Up Revised Revised Up Revised Down
Quarter ending 12/09 0 0 5 1
Quarter ending 03/10 0 0 1 1
Year ending 12/09 0 1 1 1
Year ending 12/10 1 0 2 0
Over the past five quarters there have been 4 positive earnings surprises and there have been three
straight earnings surprises the in the last quarters. This is a bullish signal and could be sign of
momentum and future growth. Over the last there have been revisions up and down but over the
past 4-week the stock’s estimates have been revised up 6 times more than they have been revised
down. This is also a bullish signal and show that Goldman Sachs is expected to do well in the coming
quarter and year.
V. Analysts’ Recommendations
Current 1 Month Ago 2 Months Ago 3 Months Ago
Buy 13 13 11 10
Outperform 4 4 4 3
Hold 5 5 6 8
Underperform 1 1 1 0
Sell 0 0 0 0
No Opinion 0 0 0 0
Mean Rating 1.74 1.74 1.86 1.90
Analysts’ recommendations of Goldman Sachs suggest a bullish standing. The stock has not had one
sell recommendation in the last 3 months and only two underperforms. The majority of analyst
recommend a buy or an outperform. The mean rating has also gone decreased from a 1.90 to a 1.74.
This steady decrease over time has shown more analysts are beginning to believe in Goldman Sachs.
VI. Institutional Ownership
The number of institutional investors has gone up with 66 more buyers than seller. This is
bullish signal and more investors would want to buy into Goldman Sachs than to sell. There
are also 40 more new positions than closed positions, which is a bullish signal. There is an
82.3% institutional ownership which is a bullish indicator and shows that institutions believe
in Goldman Sachs as an investment.