Thursday, October 15, 2009

This is an investment bank? (GS)

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 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.

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 9.5times 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 it's 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.

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