Goldman Sachs - Recovery Is Helping Employees Rather Than Shareholders

Oct.23.12 | About: Goldman Sachs (GS)

Shares of Goldman Sachs (GS) ended last week with gains of 2.8%. On Tuesday the 16th of October, the investment bank reported a decent set of third quarter results.

Third Quarter Results

Goldman Sachs reported third quarter revenue of $8.35 billion, up 133% on the year. On average, analysts expected the bank to report revenue of $7.3 billion

The bank reported net earnings of $1.51 billion, or $2.85 per diluted share. This compares to a loss of $0.84 per share last year. Reported earnings did beat analysts consensus of $2.12 per share.

During the quarter, Goldman repurchased some 11.8 million shares for an average price of $106.17 per share, for a total consideration of $1.25 billion. The firm has 34.2 million shares remaining under its current repurchase authorization.

CEO and Chairman Lloyd C. Blankfein commented on the results,"This quarter's performance was generally solid in the context of a still challenging economic environment. We continue to be disciplined in managing our operations and capital, while effectively serving our clients' needs. The focus on these priorities will serve our shareholders and the firm well over the longer term."

Segmental Information

Investment Banking

Revenue for the investment banking division rose 49% to $1.16 billion. Financial Advisory revenue came in at $509 million, which is down compared to the third quarter in 2011. Underwriting revenue more than doubled to $655 million. Notably, debt and equity underwriting increased.

Institutional Client Services

Revenue from the institutional client services came in at $4.18 billion, up 3% on the year. revenue from fixed income, currencies and commodities rose 28% to $2.22 billion. revenue from mortgages, credit, currencies and interest rates rose, partially offset by weakness in commodities.

Equity revenue fell 16% to $1.96 billion as the firm generated lower commissions and fees. Lower market volumes and lower customer balances were the main reasons behind the fall in revenue.

The institutional client services division recorded a loss of $370 million related to debt value adjustments. This compares to a gain of $450 million last year.

Investing & Lending

revenue from investing and lending were $1.80 billion. The bank made a $99 million profit on investments in shares of Industrial and Commercial Bank of China. The division furthermore made gains of $824 million on equities, predominantly in holdings of private firms. Other principal gains were made on debt securities and loans.

Investment Management

revenue from investment management came in at $1.20 billion, down 2% on the year. Assets under management rose by $20 billion to $856 billion. revenue fell on the back of lower transaction revenue.

Valuation

Total assets of the firm were unchanged at $949 billion. Goldman operates with $73.7 billion in shareholder equity. The company reported a Tier 1 capital ratio of 15.0% and a Tier 1 common ratio of 13.1%.

For the first nine months of 2012, Goldman Sachs reported revenue of $24.9 billion. The bank reported a net profit of $4.6 billion, or $8.57 per diluted share. At this rate the bank could generate annual revenue of $33 billion, on which the company could earn $6 billion, just north of $11 per share.

The market currently values Goldman Sachs at $59 billion. This values the bank at 1.8 times annual revenue, and 10 times annual earnings. The market values the bank at 0.95 times its tangible book value of $129.69 per share.

The bank raised its quarterly dividend to $0.50 per share, for an annual dividend yield of 1.6%.

Investment Thesis

Year to date, shares of Goldman have returned some 37%. Shares rallied from $90 in January and rose to almost $130 in March. Shares fell back to $90 during the summer months amidst worries about a eurozone break-up. Shares recovered, currently exchanging hands around $124 per share.

Over the past five years, shares have lost roughly 45% of its value. Shares fell from highs of $235 in 2007 to lows of $50 at the end of 2008. Shares rallied back to $190 in 2009 and steadily fell back to its current levels.

Investors grew worried that the bank's operations are less profitable than before. The $33 billion in expected revenue is down 35% compared to 2009s annual revenue of almost $52 billion. Net profits fell from $13.4 billion in 2009 to an expected $6 billion in 2012. Lower trading activity in various markets and increased regulation are hurting the bottom line.

The bankers at Goldman have a good year so far as the total allocation of compensation and benefits totaled $11.0 billion for the first nine months of the year, up 10% on the year. At the same time, the bank cut its headcount by some 5% this year. This results in an average compensation of $336,442 per employee for the first nine months of 2012. As the average banker is expected to earn around $450,000 per annum, the argument is easily made that life is better being a banker at the firm rather than a long-term shareholder. Shares are down almost 50% since their peak before the crisis.

While the bank's operating results are slowly improving the long term track record in creating shareholder value remains dismal. The relatively low dividend yields fail to make up for the capital losses which shareholders suffered over the past couple of years.

As is the same for many other investment banks, it is better to be an employee of Goldman Sachs than a shareholder.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.