Clear Skies Ahead: Goldman Sachs Has No Top in Sight
Goldman Sachs (NYSE:GS) is a pretty well-known financial company that has had one hell of a stock. It has made countless investors loads of money over the years. It is one of the most successful banks in the history of the world. The company provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. It operates through four segments: Investment Banking, Institutional Client Services, Investing and Lending, and Investment Management. The Investment Banking segment offers financial advisory services, including strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense, risk management, and restructurings and spin-offs as well as underwriting services, such as public offerings and private placements of a range of securities, and other financial instruments, and derivative transactions.
The Institutional Client Services segment is involved in client execution activities related to making markets in interest rate products, credit products, mortgages, currencies, and commodities, as well as provides financing, securities lending, and other prime brokerage services to institutional clients. The Investing and Lending segment invests in and originates longer-term loans to provide financing to clients. It also makes investments in debt securities and loans, public and private equity securities, and real estate entities. The Investment Management segment provides investment products and services, as well as offers wealth advisory services, such as portfolio management and financial counseling, and brokerage and other transaction services.
The company is among the biggest players in the industry. Competing with the likes of Morgan Stanley (NYSE:MS) and JPMorgan (NYSE:JPM), Goldman has long been a strong performer. Investment banks like Morgan Stanley and JPMorgan have ups and downs, but after Goldman’s strong performance, it is clear that investment banking is back. I think the stocks in this sector are far undervalued.
In fact, Goldman Sachs — relative to JPMorgan and Morgan Stanley — continued its leadership in investment banking, ranking first worldwide in completed mergers and acquisitions for the year-to-date. The firm also ranked first in worldwide equity and equity-related offerings, common stock offerings, and initial public offerings for the year-to-date.
Its quarter was absolutely fantastic. In fact, Goldman reported net revenues of $9.13 billion and net earnings of $2.04 billion for the second-quarter. Diluted earnings per common share were $4.10 compared with $3.70 for the second-quarter of 2013 and $4.02 for the first-quarter of 2014. Annualized return on average common shareholder’s equity was a strong 10.9 percent for the quarter as well. A large chunk of revenues came from underwriting, which produced record quarterly net revenues of $1.28 billion, including record net revenues in debt underwriting.
What’s more, the Investment Management segment generated record quarterly management and other fees of $1.20 billion, as assets under supervision increased to a record $1.14 trillion. This led to book value per common share and tangible book value per common share both increased approximately 2 percent during the quarter to $158.21 and $148.45, respectively. This means around $170 per share the stock is trading at a premium, but I see this premium widening. The firm continues to manage its liquidity and capital conservatively. Goldman’s global total assets decreased $56 billion to $860 billion resulting from an initiative to reduce activities with lower returns, including certain client secured financing activities. Lloyd C. Blankfein, Chair and Chief Executive Officer, stated:
“We are pleased with our results for the quarter in the context of mixed operating conditions during the period. This performance was driven by the diversity, strength and breadth of our global client franchise. Good client activity in Investment Banking and Investment Management as well as a better environment for our Investing & Lending activities helped offset less favorable conditions for Institutional Client Services.”
Looking ahead, banks are well-positioned. It is well-funded. Morgan Stanley, JPMorgan, and Goldman all look healthy moving forward. It is complying with funding requirements, does well under stress tests, and have been generating record returns. Goldman Sachs is a go to financial name that I am always happy to recommend. Its blowout performance and crushing of analysts’ estimates is an indication that the bank is far undervalued. My sentiment is to buy and I have a $200 price target. In fact, if banks are as undervalued as they seem, there is no top in sight for the sector.
Disclosure: Christopher F. Davis holds no position in Goldman Sachs or any other stocks mentioned and has no plan to initiate a position in the next 72 hours. He has a buy rating on the stock and a $200 price target.