The time Goldman spent cultivating relationships in China has already paid off big time, but the benefits should continue to roll in. Since Goldman and UBS are the only foreign banks allowed to do business in China, there's at least a 50% chance that any Chinese company needing someone to handle its IPO or underwrite some securities will turn to Goldman. In addition, Goldman has been in China long enough to be in a prime position. Goldman was able to get a 7% stake in Industrial and Commercial Bank of China (which is the largest bank in the world by market cap) before the companies IPO.
In addition, Goldman Sachs has been increasing its activities in China. In September 2009, Goldman invested 2.59B HKD in Geely Automobile Holdings - China's largest independent car maker.
The fact that Goldman's connections run so deep in such a key market is a huge advantage for an already impressive investment bank. Its position allows it access to an extremely promising and profitable market.
While the SEC accusation in mid April lowered the stock prices of Goldman Sachs, the company's future will likely not be heavily negatively impacted. The evidence against Goldman is not as strong as was originally thought, and the case will probably end in a lawsuit. Analysts as Sanford Bernstein predict a $671 M settlement. While this is still costly, the company's future is still bright, especially relative to its price.
As on March 5th, the weakness in the overall economy has brought a wave of selling, cutting the best performing market stocks, contracting P/E ratios and pessimistic earnings outlooks have been the main culprits over the last quarter and Goldman Sachs has been no exception. Although Analysts still hold a high regard for the company, it has been difficult getting any momentum back for the shares. Falling from a high of over $250 to its current values makes for a 40% valuation hit. While that is in line with virtually all of its peers in the financial business Goldman has proven with its track record to just simply be more flexible, better managed, and in fact smarter than the other Investment Firms. While earnings expectations have been toned down this year to around $19-$20 and $22-$23 next year, there is no reason for Goldman to be trading in the 7 P/E range. Even though 2008 profitability is expected to be lower than 2007, it still only values Goldman with a FP/E in the 8/9 range. This is a company that had over a trillion dollars worth of assets on its balance sheet at the end of 2007. It made almost $12 billion in profit on revenue of $88 billion.
Moreover, they are trying to make money over the credit crunch as well. There are Level1, Level 2 and Level 3 assets. Level 1 assets are the easy to price, liquid holdings on the banks balance sheets. Think US Treasuries. Level 2 assets may be less liquid, but they are priced according to comparable marketable assets, even if they arent' actively trading themselves. Level 3 assets, though, are the illiquid holdings that have gotten everyone in trouble lately - the mortgage backed structured products, derivatives, all that toxic waste. Those are illiquid, and have been priced according to "mark to model" theoretical pricing programs. Basically they are prices made up out of thin air. Keep with us here - last month there was an offer to the investment banks to come to the discount window of the Fed (something not done for over 70 years) and use those level 3 assets for collateral for 100 cents on the dollar FULLY LIQUID, US TREASURY-NOTE BASED LOANS. Now think about that! It's truly turning lead into gold with this type of accounting alchemy.
We saw, in most banks quarterly earnings releases, huge transfers of assets from "level 2" into "level 3", basically (we suspect) to take advantage of this total windfall of taxpayer cash to the banks. And yes, you can thank Henry Paulsen (of Goldman Sachs pedigree) for this $200 billion taxpayer funded program. Morgan Stanley has $32 billion now in Level 3 assets (it increased by 45% in Q108) and Goldman themselves added $27 billion to make their "level 3" pile $96 billion. WOW!
Setting aside the discussion of the morality / ethicality of bailing out the Wall Street banks with taxpayer money, this happened last month and we have to figure out how to make an investment return on it. The Wall Street investment banks are now in a position to swap off the worst toxic waste on their balance sheets for US Treasury notes. That's exactly what they're doing, and there's nothing you or I, or Congress, or the President of the United States can do about it. As a matter of fact, they're looking at this $200 or $300 billion program as the cost of maintaining our financial system's integrity. I guess every once in a while the roots of the tree of global finance have to be replenished with the US taxpayers' capital. (Apologies to Thomas Jefferson's great quote regarding the tree of Liberty).
'Well-Founded Relations'. The firm has numerous relationships with CEOs across corporate America. It's alumni base is also the most extensive. Both factors are integral to winning business on the street.
Recent investments into Mexican Highways, Asian Manufacturing and the rumbling of wanting to invest $800Million Euros into Eurotunnel (The connecting tunnel between the UK and France) have broadened Goldman's investment portfolio while management continually signals that through tough times in the US, the company will continue to be intelligently short. Not a bad bet to take given current economic headwinds. For these reasons, Goldman is the best player in the investment banking game and I think, while sideways trading may keep this good name down for longer than most would like, the opportunity is there to use current weakness to build up or start positions in this name
Goldman remains the king of cross selling. A strong example concerns the firm's private equity business which later advises firms on raising capital from the public markets. By actively engaging in cross selling, Goldman maximizes its revenue per client.
Not that this is alone is a legitimate reason to purchase the stock, the panic surrounding the legal problems is certainly hurting the stock and exaggerated. Both Bill Clinton and Warren Buffett have both said they felt GS had not broken any laws. Elliot Spitzer, in an interview on Bloomberg Law, said he thought the worse case scenario would be a long drawn out legal battle, by which time Wall Street will have forgotten about these problems. He also acknowledged Goldman as being one of the finer banks coming out of the credit crisis, in addition to even making it out of the crisis.
With that said, Goldman is managing just fine. Blankfein had said even if the financial bill passes and they are forbidden from engaging in certain trading activities, it would amount to about 10% of its revenue. Further the investment banking market has grown increasingly concentrated (oligopolistic) and in favor of the remaining participants.
Government needs a poster child to hang aroung a noose. That way they will appeal to the public. Since the SEC miserably failed to oversee the collapse and debacle of the financial system; they try to redeem themselves by going after GS. They couldn't even catch Bernie MADOFF and his ponzi scheme! That clown made them all look like captains of the TITANIC. Never saw the iceberg coming! They should be fired for being INCOMPETENT. GS stock is oversold. If they can settle with the SEC, and dismiss the criminal charges; their price will go back up quickly. It all comes down to one thing: they make money for their very wealthy clients. And the SEC doesn't like it a bit!
Goldman Sachs announced a new bonus plan which requires the 30 most senior executives bonuses to be paid in stocks only. This shift away from cash bonuses will allow GS to retain their top executives through large rewards, while providing an incentive for them to perform well. Shareholders will also be given a say in executive pay. These checks will ensure that shareholders and the general public remain satisfied that Goldman is not issuing excess bonuses without compromising the company's ability to keep talent.
With the slower economy Goldman Sachs is proving that it can still make a profit by relying on its traders. With stocks showing growth (within the last few weeks), quality traders at Goldman have been able to successfully make profits. Indeed Goldman Sachs brings in most of its revenue through its traders. As the recession slowly comes to an end, Goldman Sachs will experience more revenue as its IB and WM departments pick up more business. Until the recession eases up, everyone at Goldman will be depending on the traders, at least for their bonuses.
Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), Wall Street’s last remaining investment banks, were converted to holding companies and received TARP funding.
The trade off for these perks is increased regulatory oversight and slimmer profits, but both Morgan and Goldman felt the move was justified by the current market conditions. However, in June 2009, Goldman Sachs was given approval to repay the TARP loans and shield itself from the increased regulation. In addition, there is some speculation that it will shed its Holding Bank status and return to a strictly investment bank. These signs show Goldman is already well on its way to recovery and will outstrip its peers in performance.
With Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley all disappearing from the picture(from either failing or frantically selling to avoid potentially worse outcomes) Goldman Sachs has the very rare opportunity to seriously profit from its peers failures. The firm has taken a hit to its profits, but in seemingly miraculously fashion it hasn't posted a loss during the entire credit crisis. They will be looking to gain market share as the failures' former clients go elsewhere for business and while those peers that were purchased go through the long merger process to integrate the two businesses.
Investors looking to jump in now are eying a PEG ratio of less than 0.5! They've traded at low p/e's in the past, but the current p/s ratio of only 0.63 is a better indicator of the value investors will be getting. PLUS (its a BIG plus), they're launching an asset-management and mutual fund business in India, which will provide both solid growth for years to come as the Indian middle class continues to grow and also a nice hedge to its operations here in the states.
The only Wall Street brokerage to buck the trend was Goldman Sachs Group Inc., which rose to first place in the past 12 months from second, ousting Morgan Stanley. Goldman, the largest and most profitable investment bank, has led annual rankings in nine of the past 10 years, according to Bloomberg data.
Led by Chief Executive Officer Lloyd Blankfein, Goldman managed the subprime-mortgage crisis that led to quarterly losses at Merrill, Morgan Stanley and Lehman, and forced Bear Stearns to sell itself to New York-based JPMorgan to avert bankruptcy.
As on March 5th, the weakness in the overall economy has brought a wave of selling, cutting the best performing market stocks, contracting P/E ratios and pessimistic earnings outlooks have been the main culprits over the last quarter and Goldman Sachs has been no exception. Although Analysts still hold a high regard for the company, it has been difficult getting any momentum back for the shares. Falling from a high of over $250 to its current values makes for a 40% valuation hit. While that is in line with virtually all of its peers in the financial business Goldman has proven with its track record to just simply be more flexible, better managed, and in fact smarter than the other Investment Firms.
While earnings expectations have been toned down this year to around $19-$20 and $22-$23 next year, there is no reason for Goldman to be trading in the 7 P/E range. Even though 2008 profitability is expected to be lower than 2007, it still only values Goldman with a FP/E in the 8/9 range. This is a company that had over a trillion dollars worth of assets on its balance sheet at the end of 2007. It made almost $12 b illion in profit on revenue of $88 billion. Just staggering at the money machine that is this bank, moving in all sorts of Investment directions.
This is Goldman’s first loss as a publicly traded company - they went public in 1999 - and the losses are all due to the trading and investing they do for their own accounts. Losses in their Fixed Income, Currency and Commodities (FICC) division were $3.4 billion, $2 billion of that coming from holdings of junk bonds/leveraged loans and commercial real estate backed loans and securities. Another $3.6 billion in losses came from their Principal Investments division. It’s worth pointing out that these are not real cash losses but mark-to-market losses. That is, they have marked down these positions, which they still hold, in accordance with the current market environment. The real value could be higher or lower.
The service based businesses - investment banking, asset management, commissions, prime brokerage - were weak but not terribly so. Goldman still has the premiere financial franchise in these businesses, as Jeff Harte noted in his analyst report, and these are still businesses that are very much necessary in the modern financial world into the future. These businesses will rebound and Goldman will continue to earn high margins in these businesses.
They are going to survive and the shares represent compelling long term value at these levels. Much of the mark downs on their investments have probably already been taken unless you think world wide markets are going much lower.
The interesting thing is that the stock is having a great day - up 11%. All the bad news, even this worse than expected $5 a share loss, was apparently in the stock.