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Goldman Sachs (GS) was founded in 1869 and 142 years later it is now one of the most respected and prestigious financial companies in the world. Goldman is a global investment banking, trading, and investment management company with offices in 30 countries and 44% of its staff outside of the U.S. Revenue outside the Americas accounts for 45% of Goldman’s total revenue.

Due to challenges within its investment banking and trading divisions Goldman struggled in 2011. This next year will also have its challenges considering Goldman earns 45% of its revenue outside of the Americas and many countries in Europe are having difficulties.

Goldman Sachs Division (2010)

% of Total Revenue

% of Earnings

Investment Banking

12%

9.3%

Institutional Client Services

56%

53.8%

Investing and Lending

19%

30.0%

Investment Management

13%

6.9%

Institutional Clients Services (trading and executing transactions) provides the majority of Goldman’s revenue and earnings. Revenues in this area have been weak in 2011 but should have a modest gain in 2012. The investment banking market was also soft in 2011 because of the volatility in markets and there is a good chance it will be more profitable in 2012. The Investing and Lending division had a very rough 3rd quarter in 2011 and will likely have a much better 2012; however, global markets will be volatile and European markets will impact results.

Goldman experienced phenomenal growth in the last decade and it did not have an unprofitable year—even during the worst financial crisis since the Great Depression that bankrupted some competitors. The effects of the financial crisis are still clearly felt but Goldman should emerge stronger than ever.

Year

Earnings (in billions)

2010

8354

2009

13385

2008

2322

2007

11599

2006

9537

2005

5626

2004

4553

2003

3005

2002

2114

2001

2310

Financial companies such as Goldman tend to have volatile and unpredictable earnings. For example, according to YahooFinance 30 analysts that follow the company estimate Goldman’s EPS to be $7.85 to $18.28, a very wide range. Due to the unpredictability it is not surprising to see a company like Goldman selling at 6 to 10 times earnings.

Goldman has a tangible book value of $77 billion and a current market cap of $50 billion. In a good year Goldman earns $11 billion to $13 billion. If Goldman gets back to earning that much in the next two years it could justifiably sell for over $100 billion—about two times higher than where it is today. And over time the potential for Goldman to earn more just increases.

Source: Goldman Sachs: Huge Potential If Patient

Additional disclosure: Some of my clients own Goldman Sachs