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Goldman Sachs Undervalued at 10x Earnings

June 02, 2014 | About:

Goldman Sach (GS) is a multinational investment banking firm, that engages in global investment banking, securities, investment management and other financial services to primarily institutional clients. Founded in 1820, it has over time grown to become the largest investment banking firm in the world. Many top executive of the firm have worked in and around the federal government, which has made the firm the most influential Wall Street institution in Washington, D.C.

Company History

Founded in 1820 by Marcus Goldman, and the firm made its name at the time by pioeering the use of commercial paper for entrepreneurs and joined the New York Stock Exchange in 1896. The firm's capital grew rapidly and it continued to expand its business. Goldman during the Great Depression turned away from trading and toward investment banking. It was Sideny Weinberg action that restored Goldman's tarnished reputation, and he was the mover of the IPO of Ford Motors in 1956. During this time the firm became a early innovator in risk arbitrage. It continued throughout the late 1950s through the 1980s to grow and expand its business. In 1990 the firm went public, which made the top partners in the firm multimillionaries over night.

Financial Crisis

During the financial crisis Goldman was able to secure over $4 billion in profits from shorting subprime mortgages, which allowed it initially to avoid large subprime writedowns, and achieve net profits, while most of its peers where reporting heavy losses that put most of them near collapse. In September 2008, Bershire Hathaway agreed to purchase $5 billion in Goldman preferred shares, with warrents to buy another $5 billion in common stock which were execisable for a five-year term. The firm also received $10 billion preferred stock investment from the US Treasury in October 2008, as part of the Trouble Asset Relief Program.

Government Capital Injected into Goldman:

  • $589 billion from The Federal Reserves Primary Dealer Credit Facility.
  • US Treasury Term Securities Lending Facility Loaned $193 billion.
  • Goldman Borrowed a Total of $782 billion in hundreds of transcation in three months.

In 2009, the firm repayed the Treasury's investment with 23% interest in the form of $318 million in preferred dividend payments and $1.4 billion in warrant redemptions. On March 18, 2011, the firm got approval to buy back its preferred stock from Berkshire Hathaway by the Federal Reserve.

Business Operations:

  • Investment Bank - Accounts for 17% of total revenues
  • Trading and Principal Investment - Accounts for 68% of revenues and profits
  • Destress-Debt Investment - Invest in Destress Debt Globally
  • Asset Management and Securities Services - Total Assets Under Supervision of $21 billion
  • GS Capital Assets - Invested over $17 billion over 20 years

Major Private Equity Assets:

  • The Ayco Company LP
  • Hawker Beechcraft
  • Cogentrix Energy
  • American Casino & Entertainment Properties
  • CHI James Restaurant Holdings
  • USI Holdings Corporation
  • East Coast Power LLC
  • Queens Moat Houses
  • Shineway Industrial Group
  • Equity Inns. Inc
  • Arcander
  • Medfinders Inc
  • Latin Force Group Inc
  • Archon Hospitality Japan
  • CMC Markets

Finances

Balance Sheet

2013

31/12

2012

31/12

2011

31/12

2010

31/12

Total Current Assets - - - -
Cash and Short Term Investments - 72669 56008 39788
Cash - 6750 7950 5750
Cash & Equivalents - 65919 48058 34038
Short Term Investments - - - -
Total Receivables, Net - 91354 74465 78140
Accounts Receivables - Trade, Net - 91354 74465 78140
Total Inventory - - - -
Prepaid Expenses - - - -
Other Current Assets, Total - - - -
Total Assets - 938555 923225 911332
Property/Plant/Equipment, Total - Net - 8217 8697 11106
Property/Plant/Equipment, Total - Gross - 17267 17157 18976
Accumulated Depreciation, Total - -9050 -8460 -7870
Goodwill, Net - 3702 3802 3495
Intangibles, Net - 1397 1666 2027
Long Term Investments - 685691 706000 713059
Note Receivable - Long Term - 20234 3306 3747
Other Long Term Assets, Total - 55291 69281 59970
Other Assets, Total - - - -
Total Current Liabilities - - - -
Accounts Payable - 194485 198292 190504
Payable/Accrued - 18991 4108 4650
Accrued Expenses - 8292 5701 9089
Notes Payable/Short Term Debt - 218717 215369 218496
Current Port. of LT Debt/Capital Leases - 48389 58021 49925
Other Current liabilities, Total - 72848 46642 40611
Total Liabilities - 862839 852846 833976
Total Long Term Debt - 176270 181724 188247
Long Term Debt - 176270 181724 188247
Capital Lease Obligations - - - -
Total Debt - 443376 455114 456668
Deferred Income Tax - - - -
Minority Interest - 508 1450 872
Other Liabilities, Total - 124339 141539 131582
Total Equity - 75716 70379 77356
Redeemable Preferred Stock, Total - - - -
Preferred Stock - Non Redeemable, Net - 6200 3100 6957
Common Stock, Total - 8 8 8
Additional Paid-In Capital - 48030 45553 42103
Retained Earnings (Accumulated Deficit) - 65223 58834 57163
Treasury Stock - Common - -46850 -42281 -36295
ESOP Debt Guarantee - - - -
Unrealized Gain (Loss) - 327 83 113
Other Equity, Total - 2778 5082 7307
Total Liabilities & Shareholders' Equity - 938555 923225 911332
Total Common Shares Outstanding - 465.15 485.47 507.53
Total Preferred Shares Outstanding - 0.18 0.12 0.17

Income Statements

2013

31/12

2012

31/12

2011

31/12

2010

31/12

Total Revenue 40874 41664 36793 45967
Revenue 40874 41664 36793 45967
Other Revenue, Total - - - -
Cost of Revenue, Total 6668 7501 7982 6806
Gross Profit 34206 34163 28811 39161
Total Operating Expenses 29137 30457 30624 33075
Selling/General/Admin. Expenses, Total 14923 15188 14871 17892
Research & Development - - - -
Depreciation / Amortization 1322 1335 1439 1915
Interest Expense (Income) - Net Operating - - - -
Unusual Expense (Income) - 410 440 466
Other Operating Expenses, Total 6224 6023 5892 5996
Operating Income 11737 11207 6169 12892
Interest Income (Expense), Net Non-Operating - - - -
Gain (Loss) on Sale of Assets - - - -
Other, Net - - - -
Net Income Before Taxes 11737 11207 6169 12892
Provision for Income Taxes 3697 3732 1727 4538
Net Income After Taxes 8040 7475 4442 8354
Minority Interest - - - -
Equity In Affiliates - - - -
U.S GAAP Adjustment - - - -
Net Income Before Extraordinary Items 8040 7475 4442 8354
Total Extraordinary Items - - - -
Net Income 8040 7475 4442 8354
Total Adjustments to Net Income -314 -183 -1932 -641
Income Available to Common Excluding Extraordinary Items 7726 7292 2510 7713
Dilution Adjustment - - - -
Diluted Net Income 7726 7292 2510 7713
Diluted Weighted Average Shares 499.6 516.1 556.9 585.3
Diluted EPS Excluding Extraordinary Items 15.46 14.13 4.51 13.18
DPS - Common Stock Primary Issue 2.05 1.77 1.4 1.4
Diluted Normalized EPS 16.78 14.01 5.08 15.22

The firm produced net revenues of $34.2 billion and net earnings of $8 billion, an 8% increase from $7.5 billion in net earnings from 2012. Diluted earnings per share were $15.46 compared to $14.13 for 2012. Revenues that reflect the Client Services segment decreased 13% to $15 billion, and U.S. segment deceased 1% to $19 billion. It leverage ratio has fallen by more than one-half from 26 times at the end of 2007 to less than 12 times in 2013.

Goldman's excess liquidity as a percentage as a percentage of total assets grew from 5% at the end of 2007 to more than 20% at the end of 2013. Shareholder equity has grown from nearly $43 billion in 2008, to $78 billion at the end of 2013, which is a 83% increase the last six years. Capital ratios continued to improve despite returning $7.2 billion to shareholders through dividends and share buybacks.

Financial Assets and Liquidity

Ratio's 2013 2012 2011
Return on Assets 0.84% 0.78% 0.27%
Return on Equity 11.00% 10.70% 3.7%
Debt to Equity 2.26 2.41 2.58
Leverage Ratio 11.6x 12.4x 13/1x
Tier 1 Common 14.6% 14.5% 12.1%
Tier 1 Capital 16.7% 16.7% 13.8%

Valuation

Goldman Sach currently sells for 10x its earnings, 9.4x forward earnings, 6.1x its pretax earnings, 1x its book value, and sells for over 20x its free cash flow. Goldman isn't screaming undervalued but it is selling below its fair value. The firm should trade at more than 10x its earnings, which makes Goldman one of the cheapest large financial firms in the market today. Morgan Stanley, one of Goldman's peers, sells for 20x its earnings which is a highly unrealistic multiple for Goldman to trade to. Goldman to should trade for between 12x to 15x its earnings. If Goldman sold at 12x its normalized earnings then it would sell for $185.64 per share or 15x, then it would sell for $231.30. If Goldman sold at 10x its pretax earnings, it would sell for $259.20 per share which mean you can buy Goldman at 6x its pretax earnings and get a 16% pretax return on your potential investment. Goldman has a fair value range of $185 to $231 per share.

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