Thursday, 16 January 2014

Goldman Sachs: how goes the S&P, goes GS?

Goldman Sachs did not produce any surprises with its quarterly earnings.  In fact, as shown below, they increased book value per share by 5% during 2013, maintained strong capital ratios despite buying back around 8% of the shares (3% on a fully diluted basis due to stock issuance) and still retains significant core liquidity:


Operationally strength in underwriting, fixed income servicing and equity securities drove the numbers, as shown below, and even though year-on-year revenues were down in Q4, continued good cost control helped drive a 9% increase in EPS. 


The model is working in a solid manner.  My issue is what you value that at.  Return on equity of 12.7% in Q4 and 11% in FY13.  Based on the Wednesday close, the shares are trading on x1.25 the end of 2013 tangible book value.  12.7% Q4 return on equity / x1.25 price: tangible book...that's smacking of fairly valued. 

Look too how GS shares have correlated with the S&P over the last year. 


Even though GS has material debt and non-equity interests, how goes the S&P, goes GS? Based on sentiment and likely direction of return on equity, that seems a fair summary to me...

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