If it’s any constellation, So far I’m winning on this one in motley fool caps.
So, what does Goldman have to do to get back to $235 from $120?
For starters, that was the all time high of GS. Further, that’s a 95% return from where we are today.
Historically, their revenue growth: 32% and net income growth 24%.
A lot of their current price depreciation is directly a result of market uncertainty. Over time, the VIX will get back to $25. http://finance.yahoo.com/q?s=^vix
From May 2007 to November 31st 2008:
The VIX rallied 400% from 12 to 80.
Meanwhile GS declined 46% from $227 to $120.
Present values:
VIX $37.14
GS $120.36
Reverse this trend and put the VIX at $25 in 2014. This implies that GS will get back to $170 simply on the decreasing uncertainty over the next 5 years.
That still leaves a huge gap. That means that GS needs to start making money and have a growth rate. Under normal conditions, a company’s market cap reflects its current earnings and it’s expected growth rate. The larger the company, the more close to this intrinsic value the company approaches. A couple rule of thumb formulas for calculating a reasonable price are PEG = 1. In 2007, GS reported an EPS of $24.73 per share. That puts their highest price at a P/E of 9.5.
For Year End P/E ratios: Notice the decreasing trend from 2001 through 2007 even though Earnings and Revenues were growing. The estimated 2009 Earnings are $9.80 and the 2010 Earnings estimates are $12.18. Chalk those up to a P/E of 14 and you’re at $182. $235 requires a P/E of 19.5 off these numbers, implying a growth rate of somewhere around 19.5%. What is the best way for GS to achieve this growth rate when the real estate deals that they’ve been pushing into huge dollar deals are not an option anymore and they’re going to be writing off losses for a while?
Let’s see what’s going on: http://seekingalpha.com/article/130909-the-goldman-sachs-group-inc-f1q09-qtr-end-3-27-09-earnings-call-transcript?page=-1&qa=true
http://www2.goldmansachs.com/our-firm/investors/financials/current/annual-reports/financial-section-2008.pdf
Well, it looks like they’re going to be giving $1B to Warren Buffett for a few years looking forward.
For starters, sifting through their financial statements and investor annual reports is mind boggling when you take into consideration that they’re not marking-to-market, but mark-to-model (aka. Mark-to-profit)
Our global core excess pool of liquidity reached record levels during the first quarter of 2009, averaging $164 billion during the quarter.
With 462M shares outstanding, using $100B of this liquidity in order to buy reasonably rated fire-sale bank mortgages at 30 cents on the dollar with an assumed yield rate of 4% will bring in a potential net income of ($100B/$0.30)*(0.04) of $13.3B a year in earnings. Throw in a default rate of 50% and you still are pulling down $7B a year. (This would boost the stock price hugely as it would be about $15 a share EPS).
Letting money sit on the sidelines when there are assets being sold at panic/fear/irrational prices is not exactly a bright thing to do. If GS is really smart, they could target Foreign mortgages in areas like Poland, where the currency has been destroyed and is bound for a rebound, the market is set to outgrow the US, and the government is looking for stability.
Why GS has that much excess liquidity is beyond me. I think that getting back to that share price is pretty feasible if they put their money to use intelligently. If they wait for all the deals to disappear before doing anything, that’s just plain dumb.
Personally, 100% upside in a stock doesn’t excite me and I am proud to say that I am not foolish enough to own Goldman Sachs. I bought into a company today selling for less than half of cash-total liabilities and am up 100% on it so far.
Hope this helps? You may have been looking for fancy algebraic models of combinatorial power formulas. Those just don’t work. They lull acadamians into false senses of security. See Epistemic arrogance.
Glen
From: Gold, T
Sent: Tuesday, April 21, 2009 6:35 PM
To: Bradford, Glen Richard
Subject: RE: Corporate Valuation
I think 5 years will be better. Once we have a base model we want to run some sensitivity on the returns they will see from the investments they are making to get out of this mess.
Thanks for the help.
Tim
________________________________________
From: Bradford, Glen Richard
Sent: Tue 4/21/2009 5:22 PM
To: Gold, T
Subject: RE: Corporate Valuation
Ill come up with something tonight. Seeing as how I spend more time analyzing companies than doing mba coursework and how I recently dug deep into banks… What’s the time frame? 1 year? 5 years?
—–Original Message—–
From: Gold, T
Sent: Tuesday, April 21, 2009 6:15 PM
To: Bradford, Glen Richard
Subject: Corporate Valuation
Hey Glen,
Given your expertise in the area of corporate valuation, I was wondering if you could help me out. For our Finance 3 paper we are focusing on Goldman Sachs and the things they will need to do to get back to $235/share. This is probably aggressive and as a starting point we will be attempting to price Goldman Sachs at its current level of approx $120. Do you have any models that could do something like this, do you have any recommendations on an approach? We were going to look at their current strategies, like purchasing “toxic” assets, along with other things to determine what types of returns they would need to see to increase their value to a level that would demand a $235 share price.
Let me know what you think if you have some time.
Thanks,
Tim