05 March, 2008

Goldman Sachs Future rewards outweight Current downward pressure

Goldman Sachs (GS), the darling of Wall Street when it comes to Investment Banking, those smart guys who were shorting bad loans when everyone else was hiding from losses, have been feeling economic pressures as much as any other company on the Street. At this point, with the stock in the mid $160s it is a bargain if Investors expand their time lines.

Weakness in the overall economy has brought a wave of selling, cutting the best performing market stocks, contracting P/E ratios and pessimistic earnings outlooks have been the main culprits over the last quarter and Goldman Sachs has been no exception. Although Analysts still hold a high regard for the company, it has been difficult getting any momentum back for the shares. Falling from a high of over $250 to its current values makes for a 40% valuation hit. While that is in line with virtually all of its peers in the financial business Goldman has proven with its track record to just simply be more flexible, better managed, and in fact Smarter than the other Investment Firms.

While earnings expectations have been toned down this year to around $19-$20 and $22-$23 next year, there is no reason for Goldman to be trading in the 7 P/E range. Even though 2008 profitability is expected to be lower than 2007, it still only values Goldman with a FP/E in the 8/9 range. This is a company that had over a Trillion Dollars worth of assets on its balance sheet at the end of 2007. It made almost $12Billion in profit on revenue of $88Billion. Just staggering at the money machine that is this bank, moving in all sorts of Investment directions.

Recent investments into Mexican Highways, Asian Manufacturing and the rumbling of wanting to invest $800Million Euros into Eurotunnel (The connecting tunnel between the UK and France) has broadened Goldman's investment portfolio, all the while management continually signals that through tough times in the US the company will continue to be intelligently short. Not a bad bet to take given current economic headwinds. For these reasons, Goldman is the best player in the Investment Banking game and I think, while sideways trading may keep this good name down for longer than most would like, the opportunity is there to use current weakness to build up or start positions in this name.

The company is known to keep its business close to the vest, which may be a turnoff for some Investors but the company has executed so well in the past, it is hard to argue with this method. Furthermore, their track record demands a certain trust in the company direction. Analysts are similarly dumbfounded as the range of estimates for the current quarter ($2 low, $6 high, $3 average) and the current year ($16 low, $25 high, $19 average) prove exactly this point. The lack of transparency in the Investment business provides a small stumbling block for Institutional money to really drive buying. I think this block can be avoided and once Goldman presents its current quarter numbers on March 18th, Institutions will have another data point, and more importantly another level of trust in just how well Goldman executes on its business objectives.

I expect a good quarter, because as the credit situation has further deteriorated I think Goldman kept being short and curbed its own losses as much as it could. This driven by other fees and a very diversified investment strategy, especially in overseas markets will allow it to handle the US economic storm not only swiftly, but profitably as well.

Disclosure: Author is long GS