GS - Goldman Sachs

[Spekulatius]

I always get interested when a financial gets down to tangible book value, assuming the balance sheet appears solid. It’s a simple heuristic, but at this point, you simply are paying nothing for the franchise value. i have done thw several times with insurers, banks and now GS. GS ought to have  some franchise value, because it is simply the best investment banking operation out there, and wealth management is now a more significant operation than it used to be as well. GS also has probably the best risk management up there, which is importent , because banks have high leverage so small errors in asset marks cause huge swings in equity.

 

In all likelihood, thenstock is cheap here. I also think it is a better buy than some European banks I have been watching which are mired in either Brexit/recession scenario (LYG)  and the money laundry scandal in conjunction with a regulator hungry for huge fines. UBS is interesting here too, due to their lower risk business model, but their tangible book is of poor quality (Lots of DTA‘s I think)

[KCLarkin]

I always get interested when a financial gets down to tangible book value, assuming the balance sheet appears solid. It’s a simple heuristic, but at this point, you simply are paying nothing for the franchise value.

 

What is the normalized ROTE?

 

I don't follow GS and don't like their business model. But I was interested when I saw that they were trading below TBV. So I took a quick look at the financials on Morningstar and I don't see any Franchise Value. Their ROE appears to less than any reasonable Cost of Equity, so it should have negative franchise value?

 

This is surprising given the prestige of GS. The problem with investment banks is that the employees capture most of the economic benefits. I assume that is what is happening here.

 

[steph]

I always get interested when a financial gets down to tangible book value, assuming the balance sheet appears solid. It’s a simple heuristic, but at this point, you simply are paying nothing for the franchise value.

 

What is the normalized ROTE?

 

I don't follow GS and don't like their business model. But I was interested when I saw that they were trading below TBV. So I took a quick look at the financials on Morningstar and I don't see any Franchise Value. Their ROE appears to less than any reasonable Cost of Equity, so it should have negative franchise value?

 

This is surprising given the prestige of GS. The problem with investment banks is that the employees capture most of the economic benefits. I assume that is what is happening here.

 

I agree with you in that I usually don't like 'partnerships' that are on the stockmarket because , as you say, lots of profits go into the pockets of the partners.

 

But I am quite impressed with GS financials.  I don't have the details here at home, but when looking at the evolution over the last 15 years I can tell you that there was a very nice growth in book value.  I believe they even made profits in 2008.

[sleepydragon]

It’s no longer the old GS, since about 10 years ago. They don’t pay people well who do the works. All the pay go to the partners, who focus on the very short term and way better at politics and getting credits for themselves. There are also young 25 years old who became MD in 5 years because of his dad owned a big real estate company. Frankly the only people they are able to recruit is from campus, and 100% of those guys would left within 3-5 years. If you listen to the last CFO, the Martin guy, you will get a feel what many partners are like in GS. No straight words, lot of bs,  never do what they say, extremely short term focused, out of touch of the industry, and always want more money for themselves. The new management looks promising, but I am not sure if they can change the culture there.

[scorpioncapital]

What exactly does Goldman do? Banks lend money to consumers and businesses, and issue credit cards, take deposits. I-banks I would say are always riskier than retail banking hence we see Berkshire investing more in banks than in i-banks. I guess the Solomon crisis set them straight.

[ValueMaven]

The stock is dirt cheap here trading at 7x next year's EPS, and now trading below book value.  Company has lost $25bn or so in market cap due to IMDB issues (among a general selloff in the market too)...I think this is a very rare chance to go best of bread and own GS for a long, long time.  I think since 2012 they have returned something like $45bn of excess capital back to investors via dividends and buybacks.  I think it trades back to $200 quickly

 

Sincerely,

VM

[John Hjorth]

.. I think this is a very rare chance to go best of bread and own GS for a long, long time. ...

 

ValueMaven,

 

Perhaps, but - despite that - still yet best of bread US investment banks.

[Shane]

Just a quick analysis looking at Bloomberg.  Everything mentioned is over the last 10 years: 

BVPS growth CAGR 7.5%

ROE average 7.2%

Total Payout Ratio average 63%

 

Theoretical growth in BVPS should be: ROE*(1-.63) = ~2.7%.  The difference between the results and theoretical growth can partially be explained by the low P/B ratio during this time frame and consistent share buybacks (shares have declined at a >2% CAGR).... but is there another explanation for why the BVPS growth is so far ahead of the theoretical growth?  Am I thinking of this correctly?

 

Outside of this... They are indeed a great investment bank... but ROE hasn't been creating value.  I don't know the industry well, but most reports I read have them improving substantially to a 10% ROE over time... this would not create much value.  Why do those who think it is a great long-term holding believe that given this info?

 

For the record, ROTE has averaged 10.5% during this period.  Still not impressive.

[peridotcapital]

Just a quick analysis looking at Bloomberg.  Everything mentioned is over the last 10 years: 

BVPS growth CAGR 7.5%

ROE average 7.2%

Total Payout Ratio average 63%

 

Theoretical growth in BVPS should be: ROE*(1-.63) = ~2.7%.  The difference between the results and theoretical growth can partially be explained by the low P/B ratio during this time frame and consistent share buybacks (shares have declined at a >2% CAGR).... but is there another explanation for why the BVPS growth is so far ahead of the theoretical growth?  Am I thinking of this correctly?

 

Outside of this... They are indeed a great investment bank... but ROE hasn't been creating value.  I don't know the industry well, but most reports I read have them improving substantially to a 10% ROE over time... this would not create much value.  Why do those who think it is a great long-term holding believe that given this info?

 

For the record, ROTE has averaged 10.5% during this period.  Still not impressive.

 

If we assume a normalized ROE of 10% and a normalized 10x P/E, then it should trade at book value. If book grows 7.5% annually for the next 5 years, the stock would fetch $283 (call it $300 per share including dividends). So you make 84% over 5 years with hardly any downside risk, and that assumes it never trades above book value again, even though it has rarely traded below book in the 20 years they have been public. Seems like a great risk/reward to me.

 

FD: very long GS

 

[Foreign Tuffett]

For those long this: How are you thinking about the 1MDB risk?

[sleepydragon]

https://m.huffpost.com/us/entry/us_550586?ec_carp=719737554259523342

;) ;D

[Shane]

Just a quick analysis looking at Bloomberg.  Everything mentioned is over the last 10 years: 

BVPS growth CAGR 7.5%

ROE average 7.2%

Total Payout Ratio average 63%

 

Theoretical growth in BVPS should be: ROE*(1-.63) = ~2.7%.  The difference between the results and theoretical growth can partially be explained by the low P/B ratio during this time frame and consistent share buybacks (shares have declined at a >2% CAGR).... but is there another explanation for why the BVPS growth is so far ahead of the theoretical growth?  Am I thinking of this correctly?

 

Outside of this... They are indeed a great investment bank... but ROE hasn't been creating value.  I don't know the industry well, but most reports I read have them improving substantially to a 10% ROE over time... this would not create much value.  Why do those who think it is a great long-term holding believe that given this info?

 

For the record, ROTE has averaged 10.5% during this period.  Still not impressive.

 

If we assume a normalized ROE of 10% and a normalized 10x P/E, then it should trade at book value. If book grows 7.5% annually for the next 5 years, the stock would fetch $283 (call it $300 per share including dividends). So you make 84% over 5 years with hardly any downside risk, and that assumes it never trades above book value again, even though it has rarely traded below book in the 20 years they have been public. Seems like a great risk/reward to me.

 

FD: very long GS

 

It’s hard to get excited for 84% upside over 5 years, but I see the point.  I’d just say that while it rarely traded below BV, it also  used to earn a MUCH better ROE.  Seems to be neutered after the GFC.

 

Can you help me understand why BV has grown in excess of the theoretical growth rate?

[KJP]

What is the starting year for the calculations you're asking about?  Have you gone year by year to check the annual numbers to find the answer?

[no_free_lunch]

 

It’s hard to get excited for 84% upside over 5 years, but I see the point.  I’d just say that while it rarely traded below BV, it also  used to earn a MUCH better ROE.  Seems to be neutered after the GFC.

 

Can you help me understand why BV has grown in excess of the theoretical growth rate?

 

I have noticed ROE is much lower than it used to be as well.  However they also used to be much more leveraged.  Maybe the leverage explains it?

 

Their ROE hasn't been as high but they have still been growing book through and then after the GFC.  They get a lot of bad rap that they don't return to shareholders but as far as I have seen it isn't true.

 

I don't know what to make of 1MDB.  It seems run of the mill.  They have bad press for awhile, pay a fine, fire some low level exec (maybe).  Life moves on.  I think of it as time arbitrage.  Nobody wants to own it because it's in the poo pile for the next year.

[rb]

I'm may be a great investment bank. But by the numbers it looks like a not so great business. The ROE is not good. Furthermore take this into account. Goldman Sachs does a lot of business that doesn't really require any capital - such as M&A. Take those numbers out in order to see how they actually use capital. Then the answer is that their returns on capital really suck! This for a bunch of people (who are best of breed) that advise others on how to use their capital.

 

All that being said I don't disagree that at current levels it may be a good trade. I just don't see it as a great compounder that delivers higher and higher returns as they get more capital and work it.

[Spekulatius]

Investment banking is a crappy business nowadays, but GS has other business like asset/wealth management and forays into consumer banking that should be worth more than book value.

 

Also, when you own JPM, BAC or C you are also holding a buainsss with substantial investment banking operations as well, yet at least with BAC and JPM you are paying a substantial premium to book.

[rb]

Investment banking is a crappy business nowadays, but GS has other business like asset/wealth management and forays into consumer banking that should be worth more than book value.

 

Also, when you own JPM, BAC or C you are also holding a buainsss with substantial investment banking operations as well, yet at least with BAC and JPM you are paying a substantial premium to book.

I don't really get what your point is. Yes GS has asset/wealth management - other lines of business that require no capital which should reduce their ROE further on the capital part of business. How does that make it a good business? GS has a massive balance sheet. They employ massive amounts of capital. Why do they employ such massive amounts of capital at such crappy returns? If they do that why are they a good business?

[meiroy]

 

I've also become very long GS recently, even bought some LEAPs too early. 

 

[peridotcapital]

 

 

It’s hard to get excited for 84% upside over 5 years, but I see the point.  I’d just say that while it rarely traded below BV, it also  used to earn a MUCH better ROE.  Seems to be neutered after the GFC.

 

Can you help me understand why BV has grown in excess of the theoretical growth rate?

 

To each their own. Those returns (high teens CAGR) will probably be double (or more) the S&P with less risk of permanent loss. Many of us would find that exciting. :)

 

I don't really get how you expect BVPS to only have grown at sub-3% so I can't answer that part. You say the payout ratio is 63%, but how is that possible when dividends have never been a big part of their capital return story? If you are including buybacks, which would be accretive to BVPS, then I don't know why you would subtract them from your calculation.

[Shane]

 

 

It’s hard to get excited for 84% upside over 5 years, but I see the point.  I’d just say that while it rarely traded below BV, it also  used to earn a MUCH better ROE.  Seems to be neutered after the GFC.

 

Can you help me understand why BV has grown in excess of the theoretical growth rate?

 

To each their own. Those returns (high teens CAGR) will probably be double (or more) the S&P with less risk of permanent loss. Many of us would find that exciting. :)

 

I don't really get how you expect BVPS to only have grown at sub-3% so I can't answer that part. You say the payout ratio is 63%, but how is that possible when dividends have never been a big part of their capital return story? If you are including buybacks, which would be accretive to BVPS, then I don't know why you would subtract them from your calculation.

 

 

 

84% upside over 5 years is a ~13% CAGR.  I see why you’re involved with it if you expect BVPS to keep growing at 7-8%.  I did include buybacks and understand they would be accretive so maybe that is the answer, I’ve been curious about BVPS growth on GS and am trying to figure this out on a phone (promised SO not to bring laptop on vacation).  Thought given your familiarity you might have a quick & simple explanation.  The evidence is there... I just wanted to make sure I understand the why.

[Spekulatius]

Book  value hasn’t grown much over the years, but post the financial crisis, GS has become a cannibal. Their share count maxed out in 2010 at 526M shares and now sits at 371M shares. Their ROE has been a bit over 10% over the years, but net earnings yields  were lower due to fines, similar to what other banks experienced. one can argue, if these fines are a cost of doing business or not.

 

The tax reduction alone should improve the ROE by 10-15%, I think, again similar to other banks. If you by a company with a ROE of 11-12% at <0.9x tangible book and this company is a rational capital allocator (which I think GS is) then one should do OK over time. If they can do even better than that in terms of ROE, this could become quite a home run.

 

(Edited for typos)

[Shane]

Thanks Spekulatius!  This was very helpful to me.

[Jurgis]

https://m.huffpost.com/us/entry/us_550586?ec_carp=719737554259523342

;) ;D

 

I knew it.

[sleepydragon]

https://www.bloomberg.com/news/articles/2019-01-09/goldman-s-last-million-share-man-set-to-go-as-partnership-fades?srnd=premium

 

 

[gfp]

Good results out of Goldman this morning -

https://www.goldmansachs.com/media-relations/press-releases/current/pdfs/2018-q4-results.pdf

 

(just your standard #1 in its industry $70 Billion market cap company that makes over $10 Billion in net income per year..  )