Goldman sinks a birdie
Posted
Jun 17 2008, 03:52 PM
by
Matt Koppenheffer
Rating:
Ok, I'll admit that scoring Goldman Sachs' quarterly report is difficult. Was it actually a birdie because the firm easily topped analysts' earnings expectations? Or was it a bogie because earnings per share fell 7% from last year?
Either way what's clear is that Goldman is once again showing that it's the Tiger Woods of the investment banking and brokerage industry. Though it may have found itself in a sand trap here and there, the firm's solid fundamental play has kept it on the fairway more often than not during a tough year. Meanwhile, competitors like Lehman Brothers, Morgan Stanley, and Merrill Lynch have spent an awful lot of time in the rough and have been scoring double-digit bogies. And of course let's not forget Bear Stearns, which was unceremoniously asked to leave the course altogether.
Now I could try and stretch this metaphor further, but golf may not actually be the Goldman game. CEO Lloyd Blankfein's 29.8 handicap puts him more in my league than that of former Merrill chief Stan O'Neal -- let alone the aforementioned Mr. Woods. And I couldn’t even find CFO David Viniar listed on the Golf Handicap Information Network. Maybe golf is taking a back seat to managing an industry leading, multi-billion dollar investment bank.
But take your pick of metaphors -- Goldman's quarter underscored why the firm has the reputation that it does.
Not surprisingly there were some areas of weakness during the quarter. Though total investment banking revenue was down just 2%, underwriting dropped 13% driven by lower debt issuances. Equity underwriting was actually up year-over-year despite a decidedly sparse IPO market (hat tip there to Intrepid Potash and American Water). Revenue from the fixed income, currency, and commodity segment (aka FICC) dropped over $750 million, or about 30%, thanks in large part to a $775 million loss on credit origination activities. Of course, that $775 million is pocket change compared to the multi billion dollar losses that others are reporting.
On the flip side, Goldman's $2.2 billion asset management and securities services business was up 18% from the prior year. A big boost there came from its securities services and prime brokerage business which -- as The Wall Street Journal pointed out -- may be a sign that the struggles of the rest of the industry are putting more money in Goldman's pocket.
Ready to go out and buy some Goldman shares? Before you do, keep in mind that the dangers haven't changed. We're still counting on the fact that the company is accurately marking its assets properly, especially when it comes to those that don't have an active trading market. Goldman also stepped up its VaR -- value at risk, or the amount that it could lose in one trading day -- nearly 40% from this time last year. And though it brought down its total assets during the quarter, it's still a hugely leveraged company.
The stock also isn't overly cheap. Right now it's trading at roughly 2.1 times its tangible book value per share and 1.9 times total book value. This is well ahead of many of its close competitors and not far out of line with its own historical multiples.
Judging from the ratings on The Motley Fool's CAPS community, though, if you want a broker in your portfolio, Goldman is the place to be. The stock's three star rating (out of five) is leagues ahead of the one star ratings slapped on both Lehman and Merrill. CAPS All-Star PI09 rated Goldman's stock an outperformer towards the end of last year on the expectation that the firm's quality will lead to good returns over time:
Goldman is the cream of the crop when it comes to I-Banks and their [earnings] show that. With a great company, buying this stock on weakness is really a no brainer. In the short term there may be some pain, but as soon as the credit market events back out, this stock will once again thrive. Buy on weakness, hold for the long term.
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