Goldman Sachs: This Is an Investment Bank?

Goldman Sachs (GS) beat earnings by a dollar per share, which is why it's down today: Over the past two quarters they've beaten earnings by an average $1.69 per share.

The stock is off about four dollars or two percent today. After rising over 130% year-to-date, a breather may be in order. That said, they are minting money. Fixed income trading was apparently huge this quarter. CFO David Viniar pointed out that the company is taking "a bigger piece of a smaller pie," in reference to the collapse of former rivals. (See earnings call transcript.)

Given this quarter's beat and the likelihood for 4th quarter upside, they might earn $20 per share for 2009. So why is the stock trading as a lowly 9.5 times that number? Likely because the nature of their business has changed dramatically over the last few years. Investors used to give this stock a much healthier multiple when they thought of it more as an investment bank, rather than its current position as a "hedge fund," for lack of a better word.

Traditional investment banking fees have fallen from 20% of revenue in 2004's 3rd quarter to just 7% now, while principal investing comprises 81% of revenue. The volatility and uncertainty of principle investing leads investors to assign it a lower value, thus the PE of 9.5.

Still - a fantastic performance.

Comments

[john s. gordon:]

not a bank, but a very efficient conduit for moving taxpayer $ into the pockets of its gluttonous executives.
> jack

Oct 16 08:43 AM

[Ferdinand E...:]

I read this short article, and a millisecond later completely forgot what it said. Why not? G-S is the best investment bank in the world, and that is not going to change regardless of what good or bad is said about them.

Oct 16 10:24 AM

[Wildhawk:]

So "principal trading" is a full 81% of revenue and investment banking is only 7%? How could they NOT do well in this environment? They have full access to the discount window, had TARP funds until very recently, and effectively have a 0% cost of funds with which to work. The US taxpayer is effectively backstopping the largest hedge fund in the world (81% of revenue) masquarading as an investment bank (7% of revenue). And GS is set to now pay out the largest bonus pool in its history. Is this not the biggest thievery of the American taxpayer by a single private entity in the history of the country? And why, exactly, does the largest hedge fund in the world deserve all the advantages of a bank and none of the regulation when only 7% of its revenue comes from banking activities? This is institutionalized theft by GS employees of the American taxpayer, and it is a crime.

Oct 16 11:31 AM

[LoveShorting:]

To author, JSG & Wildhawk - - exactly correct but can we Americans work together to stop them??? I am increasingly skeptical.
Ferdinand - - I'm sure they pay you well to continue the deception.

Oct 16 02:35 PM

[Heinz Geyer:]

The problem with Goldman being a bank will really be the following: how can the firm justify the banking status when a disproportionately large amount of revenues/profits is derived from trading or advisory work? How much did Goldman really lend to business and consumers during the past 12 months it is a bank? In addition, how much longer are banks allowed to conduct non-bank business, e.g. own other businesses (even if it is via the conduit of private equity - managed directly or farmed out to other p.e. firms).

Oct 16 04:05 PM