A global investment banking, securities and investment management firm that provides a wide range of services to corporations, financial institutions, governments and high-net-worth individuals. GS operates through three core businesses: Trading and Principal Investments, Investment Banking, and Asset Management and Securities Services.
The Trading and Principal Investments business (68% of 2006 net revenues) facilitates customer transactions with corporations, financial institutions, governments and individuals, and takes proprietary positions through market making in, and trading of, fixed income and equity products, currencies, commodities and derivatives. The activities of this business can be grouped under three segments: Fixed Income, Currency and Commodities [FICC]; Equities; and Principal Investments.
The FICC business makes markets in and trades interest rate and credit products, mortgage backed securities, loans and other asset-backed securities, currencies and commodities. The Equities business makes markets in, trades, and acts as a specialist for equities and equity-related products. It generates commissions from executing and clearing client transactions on major stock, options, and futures exchanges worldwide through its Equities customer franchise and clearing activities.
The Principal Investments business primarily represents net revenues from corporate and real estate merchant banking investments. These net revenues are from three primary sources--returns on corporate and real estate investments, its investment in the convertible preferred stock of Sumitomo Mitsui Financial Group, Inc., and overrides. Overrides represent net revenues from the increased share of the income and gains derived from its merchant banking funds when the return on a fund's investments exceeds certain threshold returns.
The Investment Banking business (15%) provides investment banking services to corporations, financial institutions, governments, and individuals. Investment Banking business is divided into two segments: Financial Advisory and Underwriting. The Financial Advisory segment includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, and spin-offs, while the Underwriting segment includes public offerings and private placements of equity and debt instruments.
The Asset Management and Securities Services business (17%) offers investment strategies, advice and planning to institutions and individuals worldwide, and provides prime brokerage, financing services and securities lending services to mutual funds, pension funds, hedge funds, foundations, and high-net-worth individuals. GS's assets under management increased 27% in 2006, to $676 billion.
In June 2006, Lloyd C. Blankfein was named as chairman and chief executive officer. The management change was due to Henry (Hank) M. Paulson, Jr., GS's then chairman and CEO, becoming U.S. Secretary of the Treasury.
At the end of FY 06, GS's net revenues had increased 51%, to $37.3 billion, driven by improvements of more than 50% at both the Investment Banking and Trading and Principal Investments businesses. Investment banking benefited primarily from underwriting volume, up 73% year to year, while the trading business saw a 60% improvement at its FICC desk. Operating expenses increased 38%, to $22.7 billion, more than offset by the growth in net revenues. Net earnings registered a robust 70% increase, to $9.4 billion and EPS rose to $19.69, from $11.21. Assets under management were 27% higher than a year earlier at $676 billion.
The most recent quarter saw EPS of $4.93 vs. $4.78 in 2006 and was shy of $5.35 estimates and six month EPS $11.61 vs. $9.86 in 2006. Top line was hurt by exposure to sub-prime mortgages, although equity and investment banking results were strong. Margins were pressured somewhat by continued global expansion and high levels of business activity.
Here is the thing. Goldman is undoubtedly the king of this sector, yet it trades at a discount to its competition. At only 10 times earnings, it is just too cheap to pass up. Rather than jump at the new Private Equity companies that are rushing to go public and will soon see their tax rates soar, why not take a run with the unquestioned leader in the field?
I am . . .
GS 1-yr chart: