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Goldman May Report First-Ever Loss in 4th Qtr (GS)

Posted on | November 1, 2008 Time: 8:23 pm |

As reported by Reuters, analyst at UBS is calling for Goldman Sachs to report its first ever loss as a public company in the 4th quarter, expecting lower revenues than the current consensus of $6.3 billion. The analyst notes continued weakness in global M&A, new equity issuance, and other investment banking activity. These trends are certainly true, and only the back end of September would have been reflective of this in Goldman’s 3rd quarter earnings report. The 4th quarter report, meanwhile, will likely reflect three full months of frozen investment banking (barring a stunning turnaround to close out the year).

The article also throws out some estimates for how much in write-downs Goldman may have to take on its commercial real estate portfolio (worth $14.6 billion) and private investments (worth $17B plus). While Goldman is consistently the smartest hedger in the world of high finance, they are sure to take bigger losses than anticipated in the final quarter.

I wouldn’t be surprised to see $3-$4 billion in write-downs, certainly nothing to sneeze at but lower than the $5 billion tossed around in the Reuters article. Even though earnings per share have come down in each of the past four quarters, for Goldman to run even for a quarter or two during a recession would actually be pretty impressive. It’s certainly more than we can say for any of their (again, mostly “former”) competitors.

In the past 4 quarters, Goldman has earned a combined $16.63 per share. If they came in at $0 net profit in the last quarter, the 4 quarter run-rate would still be above $9 per share, for a rolling P/E still under 10 times.

Goldman vs. Morgan Stanley

The article also posts the question as to why Goldman shares deserve a premium to Morgan Stanley, the last of the stand-alone (former) investment banks. According to the article, Goldman trades for 1.1x tangible book to Morgan’s .5x or less. Two things quickly jump across my mind here…first off, in this market one man’s “tangible” is another’s fairy dust, but let’s assume for a moment that the estimates are accurate. Both multiples - 1.1 and .5 - are disgustingly low.

I remember Merrill & Morgan briefly getting down below 1 times book at the peak of the 01-02 recession, so it’s not unheard of. But those low levels don’t last for long, not then and not now unless another major, systemic collapse occurs in the system.

In my mind both Goldman and Morgan should perform well from here, simply due to valuations. They won’t be able to lever up to get earnings growth like in the “old” days, but they will gather up deposits and eventually investment banking activity will juice earnings and margins, just like they always have.

But does Goldman deserve a multiple to Morgan? Most certainly. Here’s why, and it really says it all. When Morgan desperately needed capital, they had to do a deal with Mitsubishi Financial Group. No offense to Mitsubishi, but they weren’t in the top 10…or 20….or 50 choices for Morgan.

When Goldman desperately needed capital, they were able to get the deal (the man) who was likely their #1 choice - Warren Buffett. He even gave a public thumbs up on the company and its management. There’s your valuation multiple right there.

{Investment Thesis for Secular Trends Portfolio}

disclosure: author does not hold positions in the companies mentioned.

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Category: Financials, Fundamental Analysis
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