Hey Youtube, I'm Jimmy.
In this video I'm going to walk through my analysis of Goldman Sachs ticker
symbol gs. This continues our series where we're
analyzing all 30 stocks in the Dow Jones industrial average.
This is the twelfth video. In that series,
you can see a link in the description below to all those videos.
Once we complete our analysis, we're going to try to build three
different portfolios of value of growth in a dividend portfolio so we can break
Goldman's business into four main segments,
institutional client services, investment banking,
investing in lending and investment management,
and as you can see, this is the breakdown of revenue
according to segments. Institutional client services is the
largest segment their, the blue bars,
but they're getting much closer to the other segments as far as revenue goes.
Now the goal of the research that I did on Goldman Sachs was to see if they're
worth adding to one of our portfolios, so I'm going to jump ahead before we
dive into what they do.
I'm going to jump ahead to this revenue chart.
Now. When I got to analyzing the financial
the past 10 years hasn't done a lot as far as the way of growth.
I expected their revenue to be in a much more uptrend than it has been because I
know that a lot of what they do is tied to money management and if we look at
this chart with the S&P 500 on top of it,
we can see that the S&P has really done quite well and revenue didn't seem to
match what they were doing. Now,
if we were to add earnings per share to that,
it looks like earnings per share was up in 2017,
but as you could see, it's not terribly impressive.
Now this leads me to what the stock has done.
I was curious what the stock price did.
So here's a 10 year chart of Goldman Sachs and as we can tell it's not bad,
but it's not great. In fact,
a total return for Goldman Sachs for the past 10 years was about 176 percent,
which is a bit over 10 and a half percent a year.
Compare that to the s and p 500, which is up almost 250 percent and
that's about 13 percent per year. Okay.
So that's what's happened up until now. But if we're going to edit to the
portfolio, I think it's important that we,
based on what we believe will happen, not necessarily what has happened.
Perhaps they're underperforming over the past decade is an opportunity.
So let's press forward. So there's been some big changes.
Goldman, they have a new CEO,
David Solomon, new coo,
John Waldron and a new cfo. Steven.
Sure. So Solomon,
the CEO, he's worked with Waldron before.
And the real question when Solomon took over for Lloyd Blankfein was would they
focus more on investment banking since both Waldron and Solomon are investment
bankers?
So a few weeks ago, the new CFO,
Steven, sure he did a presentation with Merrill
Lynch and there he laid out where go Goldman would be heading and this side,
this comes directly from their presentation.
This is the $5,000,000,000 growth initiatives that they started
before this team took over and this team has confirmed that they intend on
keeping this in place. Now we can see that the largest revenue
creator so far is from the investing and lending division and this division
focuses on institutional lending and there marcus brands,
Marcus offers high yield savings and loans to individuals.
So ultimately this division is more like your typical bank and this is important
because as management has recently said this should add stability to revenue.
So they intend to grow this division and this should be a good thing.
Okay. Now moving over to the investment bank
division, we can see that this under performance
in new deal volume and I think that this is possible given the current
This chart here, this is a deal's done globally since
2008. This includes mergers and acquisitions,
buybacks, spinoffs,
joint ventures and things like that, and all of this is where this division
plays for Goldman Sachs. Now this isn't just Goldman Sachs,
this is worldwide. All the companies and the blue bars are
the dollar volume of deals, so the most recent number was a bit over
$5,000,000,000,000 and the red line is a number of deals
that have actually been executed. Investment banking has been rather
consistent for Goldman over the past few years and we expect it to continue to do
so and the real, the top three players in investment
banking is really Goldman Sachs, Morgan Stanley and jp Morgan,
and unfortunately this intense competition can often lead to companies
lowering fees. That's why we started dipping revenue
and I think that this is something that we're gonna want to watch and if we look
at the revenue chart, we can see that this segment has been
The red bars, so what's really been a killer for
Goldman is there institutional clients services there?
The blue bars, the institutional clients services
business does a few different things. One of the key things they do is trading
for clients. Trading is vo both very volatile and
it's an environment that has evolved rapidly as technology has developed.
This is where Goldman Sachs investment research lives.
They provide research and hopefully execute more trades,
but as we could see from a revenue chart,
it's been declining, but the good news is that although it's
been declining over the past few years, the first three quarters of 2018 have
already almost met what 2017 did and this is primarily because trading
specifically in the u, s has been very volatile in the stock
market and a volatile stock market is a good thing for trading.
Now this leads us to the investment management division.
Once again, you can see that the investment
management division, the purple bars has been mostly
consistent. Investment Management has long been a
cornerstone of Goldman Sachs and they control north of one point
$4,000,000,000,000 split between institutions,
high net worth individuals and third parties.
So now what? Well,
frankly I really liked what the new management team is putting in place.
Sure. The past 10 years have been somewhat
call it stagnant from both a growth perspective and a revenue perspective,
but for me, I think that the direction that
management is heading, gearing up for a more consistent growth
profile I think is a good thing. I liked their investing and lending
business. I think that should add,
add some consistency. I like the position of the investment
banking business. I think that they have room for growth.
I also liked the investment management division,
which seems to be pushing to get the other divisions in the company to add
more assets under management.
Overall, I think that this should has the
potential to lead to a productive growth profile over the next couple of years
and ultimately it looks like the next quarter or so should do well for
Goldman. From a stock perspective,
volatility has remained high, which should bode well for their
trading. Business Management has stated their
desire to find good acquisitions that could add to growth and I think we might
see an announcement in that area and if we do that could help the stock.
Plus a management has said that they're trying to be more transparent to going
forward and I think that this is a good thing.
Generally the more transparent accompany is the easier it is for analysts and
potential investors to value and that should ultimately lead to more in theory
should lead to more investments in Golden.
So the question now is what do we think Goldman is worth while the current Ford
pe is about eight x?
Morgan Stanley's got about nine x and JP Morgan is at about 11 x.
That being said, if we take the average of JP Morgan,
Morgan Stanley gives us 10 x and that's right where the p 500 financials
indexes, so I think that's a reasonable multiple
to use, but before we jump ahead and just use
that one, there's another evaluation tool that I
think is very useful for financial companies and it's called the
sustainable growth rate. The sustainable growth rate is the rate
that earnings and dividends can keep growing.
Yet basically we take the company's return on equity and we multiply that by
their retention rate. That retention rate is how much the
company keeps after pays out the dividends,
so if they have a net income of 100 and they pay out 30,
well their retention rate would be 70 since there's they paid,
they've retained 70 percent of their net income.
Now I've thought of looking at the sustainable growth rate because when I
was reading through the 10 K and the 10 queue management kept bringing up how
important return on equity was to them and I know that a sustainable growth
rate is a good tool for financial companies like insurance companies,
banks and financial companies like Goldman Sachs.
So here's how we calculated Goldman's sustainable growth rate for 2017.
They had a return on equity of about five point zero five.
They had, they retained about 68 percent of their
earnings. That means that they paid out a bit over
32 percent. That gave them a sustainable growth rate
of three point four three. Now if we look at Morgan Stanley,
we can see that they have a sustainable growth rate of five point eight one and
jp Morgan comes in at six point five six.
So what does this tell us?
Well, the sustainable growth rate ultimately
tells us how fast the company can grow, assuming they don't issue any more stock
or take on any more debt. Now there are a few ways that they can
change their sustainable growth rate. They can improve their return on equity,
they can lower the percentage of net income that they pay out as dividends or
they can issue more debt or stock. Now I think that this is important
because I feel that it helps us gauge where Goldman should be trading relative
to peers and although the industry is trading at an average pe of 10 x,
I think that with this new information that Goldman should be trading at the
lower end of that pe, how about we call it nine x and with
2019 expected eps of 20 5:58, that implies that Goldman should be
trading at right around $230 per share.
The current price is just below $200 per share.
So there appears to be some upside. So there's a blowing in any of our
portfolios. Well,
I think probably not the growth portfolio,
unless the new management team can do something to really turn things around.
I. I don't think it makes sense.
They're the dividend portfolio. Maybe they have a yield of about one
point five percent, but known that they're in a transition
period right now. I think it might be better to avoid them
from a dividend perspective. That being said,
it is interesting to note that they have some preferred shares that are currently
trading north of five percent, so that could be interesting to add that
from a dividend perspective. Now,
how about the value portfolio? I think that there's some real risk in
Goldman staying stagnant over the next few years.
That being said, I think that if we're trying to build a
great portfolio, we might be better off sticking with
companies that we have extreme confidence in.
So with that in mind, I think that if we were going to add
this to the value portfolio, this stock,
that would have to be significantly more than the 15 or so percent upside that we
currently calculated. If it keeps falling,
if the stock keeps falling. I think that this could get interesting,
but let me know what you think. I know a lot of people love Goldman
Sachs and I was very surprised to see how little their revenue has gone up.
I fully expected that they were going to be in a solid uptrend for the entire 10
past 10 or so years. That being said,
this could be potential opportunity for us,
so let me know what you think in the comments below.
Would you add this to any of the portfolios and is there anything in the
research that I didn't touch on that you think is important?
If so, post them in the comments below and if
you haven't done so yet, hit the subscribe button and I'll see
you in the next video. Thanks.