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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Goldman Sachs

April 23rd 2010 Goldman Sachs
NYSE Symbol: GS
Industry: Investment Banking
Price as of 4/23: $157.40


The markets were performing well until a week ago Friday when the SEC charged investment banking giant, Goldman Sachs with fraud. Goldman's stock dropped 13% dragging the markets with it. Goldman responded saying all the right things, stating they will vigorously defend their position. This week, news or evidence to support Goldman's defense has come to light, which hopefully will pave the way for a settlement. This week we'll feature Goldman Sachs as the stock of the week. Goldman is not a conservative investment. A large percent of their profits come from trading profits which can be volatile. The recent fraud case creates more pause for investors, but unfortunately good stocks don't sell off on good news. The fraud charges and pending bank regulation will create a lot of headline risk in the short term, but long term growth investors are being provided a good buying opportunity in arguably the best bank on Wall street.
On Wednesday, Goldman Sachs reported blow out earnings. Goldman Sachs beat by $1.58, making $3.3 billion or $5.59 per share verse estimates of $4.01. In fact a number of analysts have been lowering their numbers anticipating Goldman to actually miss estimates. That didn't happen. Revenue in the quarter rose 35.5% to $12.78 billion verse the $11.07 billion consensus. Net revenues in investment banking came in at $1.18 billion, 44% higher than the first quarter of 2009. Net revenues in financial advisory division came in at $464 million, 12% lower than the first quarter of 2009, reflecting a decline in industry-wide completed mergers and acquisitions. Net revenues in the firm's underwriting business came in at $720 million, more than double the amount in the first quarter of 2009. Net revenues in equity underwriting were significantly higher, primarily reflecting a significant increase in industry-wide equity and equity-related offerings compared with a difficult first quarter of 2009. Net revenues in trading and principal investments came in at $10.25 billion, 43% higher than the first quarter of 2009 and 60% higher than the fourth quarter of 2009. These results reflected strong performances in credit products, mortgages and currencies, which were each significantly higher compared with the first quarter of 2009. Net revenues in equities were $2.35 billion, 18% higher than the first quarter of 2009. These results reflected strong net revenues in derivatives, which were significantly higher than the first quarter of 2009. The company repurchased 13.2 million shares of its common stock at an average cost per share of $172.15, for a total cost of $2.27 billion, higher than it is now. Including the effect of these share repurchases, common shareholders' equity increased $2.23 billion during the quarter. The firm's Tier 1 capital ratio under Basel I was 15.0% as of March 31, 2010. The firm's Tier 1 common ratio under Basel I was 12.4% as of March 31, 2010. Book value per common share increased 4% during the quarter to $122.52 and tangible book value per common share increased 3% during the quarter to $111.41.
Goldman's stock has not been this cheap since January. Currently the stock is trading for 1.8 times sales, 1.3 times book value, and trades for a PE of 8 times this years earnings and 7 times next years earnings. Obviously the stock remains cheap due to the uncertainity regarding the SEC fraud case and pending banking regulation. But the uncertainty has provided a buying opportunity for long term investors. Warren Buffett is counted as a major shareholder and I don't think he's in any hurry to sell his position.