Wednesday, June 08, 2011
© 2011 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT THE END OF THIS REPORT.
Goldman Sachs (GS)
Decision Making Just Got More Difficult
Richard X. Bove
It is becoming increasingly apparent that a terrible wrong may have beendone to Goldman Sachs. Evidence is now mounting that the company didnot have a net short position ate crucial time under study and that theSenate Committee may have misread the numbers. It is also becomingapparent that Mr. Blankfein did not misrepresent to the Senate Committeebecause Goldman was not net short at the time the firm was accused of misrepresenting its position.However, it is also becoming apparent that the company is facing a relativelybleak second quarter and that its secular outlook has been weakened. Theearnings estimates for the company have been reduced as follows: a) the2011 estimate has been cut from $13.66 per share to $11.75 per share; b)the 2012 estimate has been reduced to $17.72 per share from $18.07 pershare; and c) the 2013 estimate has been reduced to $19.76 per share from$19.99 per share.How does one weigh these two conflicting pieces of information? It nowlooks likely that the entities investigating the company may resolve theirsearches without charging the company of any misdeeds. This is likely tosway investor sentiment toward the firm.On the other hand it also seems likely that the earnings estimates beingmade for this company for the second quarter and year are much too high.Volumes on the major exchanges have been quite weak all this quarter. Thedata from the Federal Reserve of New York indicates that while trading incorporates has held up, activity in the rates market has plummeted, and theMBS market continues to weaken.Commodity prices have fallen and activity has declined. Commodity optiontrading on the New York Board of Trade has plummeted since March.Volatility in the currency markets has also come down. Trading in currencyfutures has plummeted.On a longer term basis, the industry is now feeling the pressure from aweakening economy and increased government pressure. It is evident thatthere will be a systemically important financial institution (SIFI) buffer. Plus,there are more rules coming that will crimp trading activity.M&A activity could also slow if the economic outlook does not improve.Companies are likely to become cautious once again.Thus, as Goldman emerges from its government problems, it now faceseconomic issues that may cause difficulty with the stock. Any decision on therating will be deferred until other analysts adjust their estimates on thecompany and the political entities begin withdrawing their attacks.
Note: The tables in this report have been prepared by Rochdale Securities from sources believedto be accurate. However, accuracy cannot be guaranteed.
2010 2011 2012 2013Mar $5.59 $1.56 $4.32 $4.84Jun $0.78 $2.84 $4.57 $4.97Sep $2.98 $3.39 $4.34 $4.90Dec $3.79 $3.96 $4.49 $5.06Year $13.18 $11.75 $17.72 $19.76Previous $13.18 $13.66 $18.07 $19.99Consensus $13.18 $14.64 $19.17 $21.36P/E Multiple 10.0x 11.2x 7.4x 6.7x
Rating Sell SellTarget Price $120.00 $120.00 Normalized Earnings $21.00 $21.00
Stock Data (03/11)
Current Price $131.5952 Week Low/High $129.50 $175.34Est. 2011 Rev Per Share/P:RPS $69.06 1.91xEst. 2011 EPS/PE $11.75 11.2xBook Value/Price:Book $128.32 1.03xTangible BV/Price:TBV $118.63 1.11xDividend/Yield $1.40 1.1%Shares Out/Mkt. Cap (mil) 583 $76,717
Income Statement (mil)/ Percent of Revenue (03/11)
Investment Banking $1,269 10.7%Principal Transactions $2,612 22.0%Market Making $4,462 37.5%Commissions & Fees $1,019 8.6%Investment Management $1,174 9.9% Net Interest Income $1,358 11.4%Operating Revenues $11,894 100.0%Personnel Costs $5,233 44.0%All Other Expenses $2,621 22.0%Pretax Income $4,040 34.0%
Balance Sheet (mil)/Percent of Assets (03/11)
Cash $42,683 4.6%Segregated cash & securities $53,512 5.7%Fed Funds & Repos $162,094 17.4%Securities Borrowed $184,217 19.7%Receivables $87,619 9.4%Trading assets $374,806 40.2%Other $28,358 3.1%Assets $933,289 100.0%Short-Term Debt $53,746 5.8%Deposits $38,727 4.1%Trading $150,998 16.2%Repos $165,475 17.7%Other Securities $49,136 5.3%Payables $193,396 20.7%Other Liabilities $35,549 3.8%Long Term Debt $173,793 18.6%Preferred Stock $3,100 0.3%Common Equity $69,369 7.4%Est. Tangible Common Equity $64,131 6.9%
Key Ratios (03/11)
3-Year RPS CAGR (11.4%)3-Year EPS CAGR (19.4%)Tier One Common12.8%Return on Equity15.8%Return on Assets0.29%
Source: Trade Station