We are willing to base our investment thesis on what we believe is the best management team and strongest franchise in the sector, when it is trading at a fraction of TBV [Tangible Book Value].
– Jeff Harte, “Goldman Sachs Still Has Appeal” (subscription required), November 11, 2008, upgrading GS from Hold to Buy
Goldman Sachs (GS) this morning reported a larger than expected loss of $4.97 a share for their 4th quarter ended November 28, 2008 (GS FY 4Q Earnings Release). Analysts and investors were all expecting Goldman’s first loss (The Wall Street Journal ran a front page article two weeks ago titled “Goldman Faces Loss of $2 Billion For Quarter” (subscription required)), but analyst estimates were for a loss of $3.50. Sandler O’Neill analyst Jeff Harte said yesterday evening on Fast Money that he was comfortable with his estimate for a loss of $3.78 a share and thought that that would be closer to right than any estimates towards $5 a share.
This is Goldman’s first loss as a publicly traded company – they went public in 1999 – and the losses are all due to the trading and investing they do for their own accounts. Losses in their Fixed Income, Currency and Commodities (FICC) division were$3.4 billion, $2 billion of that coming from holdings of junk bonds/leveraged loans and commercial real estate backed loans and securities. Another $3.6 billion in losses came from their Principal Investments division. It’s worth pointing out that these are not real cash losses but mark-to-market losses. That is, they have marked down these positions, which they still hold, in accordance with the current market environment. The real value could be higher or lower.
The service based businesses – investment banking, asset management, commissions, prime brokerage – were weak but not terribly so. Goldman still has the premiere financial franchise in these businesses, as Jeff Harte noted in his analyst report, and these are still businesses that are very much necessary in the modern financial world into the future. These businesses will rebound and Goldman will continue to earn high margins in these businesses.
So, fundamentally, as I wrote three months ago after Goldman reported 3rd quarter earnings, “Goldman Is Okay”. They are going to survive and the shares represent compelling long term value at these levels. Much of the mark downs on their investments have probably already been taken unless you think world wide markets are going much lower.
The interesting thing is that the stock is having a great day – up 11%. All the bad news, even this worse than expected $5 a share loss, was apparently in the stock. Like I said: “When Stocks Go Up On Bad News, That’s Good”.
Disclosure: Top Gun is long shares of Goldman Sachs (GS).