Investment thesis: GS is arguably the most well-respected inv. bank, especially after deftly navigating the 07-08 credit crisis. We view GS as the best-diversified, most global franchise in the industry, with ample intl. growth prospects. The firm has consolidated its toptier position among Capital Markets firms, enabling it to generate strong through-cycle ROEs and book value growth.
Wow, not sure even where to start with Guy's opening salvo. If it was made a little clearer that a "inv. bank" has the implicit backing of the U.S. government for any and every blunder it may make, and the potentially explicit backing of all the collocation facilities at the 60 Hudson carrier hotel, maybe Guy's fascination would be a little more subdued. As to the "most well-respected" bit... well, Zero Hedge won't touch that topic. But Guy may consider adjusting the boilerplate investment thesis shortly.
More from the report:
2Q Trading conditions strong, U/W recovered markedly
Trading conditions remained favorable through 2Q. Buoyed by stable volumes as spreads tightened, fixed income markets continued to see wide bid/ask spreads on muted competition. Thus, we’ve again raised Trading forecasts. Also, cont’d asset price improvement (ICBC, equities and debt), offset by likely real estate losses, should drive increased Principal revs. In IB, M&A remained weak, but Equity and Debt U/W rallied significantly. 2Q could be a record quarter for GS in Equity U/W, though volume data is skewed by their own capital raises.
Comp. leverage could drive significant 4Q earnings boost
At current accrual rate (and assuming rev forecasts correct), GS appears on track to accrue significantly more comp than ‘08, despite little change in headcount. Even with 4Q accrual of 25%, comp would still be up 64% YoY by our estimate. In this scenario, ‘09E would reach $16.30, with ROE of 16%.
Buy: PO to $175 (from $144); 16%+ ROE achievable
PO increase reflects ‘09E/’10E ROE of 16%+, bringing BVPS to over $113 by the end of 2009 and $122 in 12-months. Based on this, ROE suggests 1.6x BV multiple or ~$175, after 10% “haircut” to account for market fluctuations. GS has consolidated its top-tier position among Capital Markets firms, combining front-rank Banking franchise with unmatched risk-taking/risk-management skills in a market that strongly rewards these because of decline in competitor risk appetite. Risk/reward appealing, with upside potential to 1.6x BV, downside unlikely below 1.1x BV.
Decline in competitor risk appetite? How about outright decline in competitors? And how about the unwillingness of competitors to directly engage GS in core fields in which the firm seems to have achieved a barrier to entry with a blessing as if from above? What is so difficult about calling up two firms to gauge investor interest in a REIT offering and then following through with one, if all it takes is a simple analyst upgrade and a brief stay on the Goldman Conviction Buy List (sorry, bad example, Merrill recently figured out just how simple it is to beat Goldman in its, allegedly, own game)... But fixed income sales and trading? At 40 bps bid/offer spreads for a 300 bps trading CDS or 1.5 points pick on a bond, a blind monkey with Down's syndroms would be rolling in cash. As for being a Supplemental Liquidity Provider? Well, why take the free money from Goldman and from the zillions in program traders who scalp each other for nickels per trade. Who would possibly want to do that. Not like being an SLP provides one with a plethora of implicit and explicit additional benefits.
No, all rhetoric aside, investors would be stupid not to buy into the Goldman hype - pretty soon it will be the only investment bank standing if LB's grand plan has its way. And there is nothing on the horizon to indicate otherwise. As for Goldman employees who are set to make a record $1 million in average comp this year - we all feel bad for them, knowing how hard they work scouring the web for pieces of rogue code or kibitzing on various websites checking on minute by minute updates of whether anyone has the temerity to write something negative about the mothership.
Sо why stop at $175 - go for a cool round number, like $1,000 or $1,000,000/share. At the current rate of dollar devaluation the latter has a very high probability of being achieved, nevermind that the investee would likely be happy to facilitate said devaluation as much as it can... And if oil were to somehow hit the same price/barrel, so much the batter. LB et al will be happy to show up at next year's investor meeting and discuss how Goldman managed to generate an ROI of infinity +1. Zero Hedge, with its 1 share of GS will be proudly there, clapping and cheering in a roofied daze, pre-vaseline administration, clutching the Goldman Sachs Ethics Manual, which has long ago replaced the Bible, Koran, Torra, the Bhagavad-Gita, and the Sermont on the Mount, among others, as our bedside soul cleansing material. Of course, if in the meantime the green shoots turn out to be green swans and the economy crumbles, one can bet that Goldman will be there, generating a cool 20% ROE. Sphere: Related Content Print this post