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On July 28, 2021, I followed up my January 22, 2021 Goldman Sachs (GS) post with this stock analysis.
With the release of Q3 and YTD results on October 15, 2021, I once again revisit GS.
I initiated a GS position on November 19, 2018 and acquired additional shares on January 22, 2021; shares are held in one of the 'Side' accounts in the FFJ Portfolio.
Goldman Sachs - Stock Analysis - Business Overview
Part 1 of GS's 2020 10-K provides a comprehensive overview of the company.
A brief history of the company is found here and there is a fascinating 10-part documentary in which GS's history is chronicled.
Goldman Sachs - Recent Events
Petershill Partners plc - IPO
Petershill Partners (PHLL.L), which is operated by Goldman Sachs Asset Management, was founded in 2007 and is run by co-heads Ali Raissi and Robert Hamilton Kelly.
This alternative asset manager very recently made its London, UK debut with a £4bn market capitalization. This recent IPO gives retail investors the chance to buy into a sector that has generally been limited to institutional investors because it commands high fees and asks clients to lock up their money for many years.
PHLL.L provides capital and strategic support to high-quality alternative asset management firms that are well-positioned for further growth and development. The current portfolio consists of minority investments in 19 private equity and hedge fund managers with a combined $187B of assets under management.
GS's purpose for creating Petershill in 2007 was to take stakes in private equity and alternative investment managers to benefit from the management and performance fees they generate. Subsequently, this business has boomed alongside the significant growth of the alternatives industry; Dyal Capital, Blackstone’s Strategic Capital Holdings and AlpInvest Partners are just 3 of Goldman Sachs Asset Management's competitors.
Roughly 80% of Petershill’s assets are in private market managers with the remaining ~20% in hedge fund strategies.
PHLL.L pays GS a recurring operating charge of 7.5% of its income from investments in management companies. In FY2020, the recurring charge would have been ~$17.2 million.
It does not disclose the salaries or 'carried interest' (the share of profits from successful funds) received by Raissi and Hamilton Kelly.
The published pricing statement related to the PHLL.L IPO lists shareholders that own more than 3% of the company before and after the IPO. Most of these, however, are fund names and there is no disclosure of investor identities.
GS - Petershill Pricing Statement - September 28, 2021
I am reluctant to invest directly in Petershill in that I do not have information about the assets, fund performance, revenues or profits of each. This lack of transparency is not unusual since managers do not want to publicly disclose this highly sensitive information.
I, therefore, choose to have exposure to PHLL.L via my exposure to GS.
Launch of Transaction Banking in the UK
On June 21, 2021, GS announced the launch of Transaction Banking in the UK, thus expanding the business which was successfully launched in the US in 2020.
Transaction banking (TB), also known as cash management and treasury services, is the business of providing solutions for clients’ day-to-day treasury operations as well as optimizing working capital.
The following global trends are leading to a renewed focus on the TB sector:
- the globalization of trade;
- the increasing importance of liquidity management;
- it often has relatively low regulatory capital requirements;
- the business is sticky (switching service providers is highly disruptive); and
- it presents opportunities to attract additional business.
This is the line of business in which I spent the better part of my banking career.
Acquisition of NN Investment Partners
On August 19, 2021, GS announced its intent to acquire NN Investment Partners from NN Group N.V. for ~€1.6 billion. A closing by the end of Q1 2022 is subject to regulatory and other approvals and conditions.
NN Investment Partners is a leading European asset manager based in The Hague, Netherlands, with ~$355B in assets under supervision and ~$70B in assets under advice.
NN Investment Partners will join Goldman Sachs Asset Management following the closing of the transaction, with the Netherlands becoming a significant location in GS's European business. GS has indicated it believes that NN Investment Partners’ expertise will strengthen its fund management and distribution platform across retail and institutional channels in Europe.
This acquisition is highly complementary to Goldman Sachs Asset Management’s existing European footprint and will add new capabilities and accelerate growth in products such as European equity and investment-grade credit, sustainable and impact equity, and green bonds.
Assets Under Supervision include assets under management and other client assets without investment discretion on which NN Investment Partners earns fees for advisory and other services.
In contrast, Assets Under Advice means the aggregate net asset value of securities and investment products for which the investment adviser has rendered investment advice irrespective of whether the implementation services are provided by the investment adviser or concluded by the client directly or through other service providers.
Acquisition of GreenSky, Inc.
On September 15, 2021, GS and GreenSky, Inc. (GSKY) announced a definitive agreement under which GS will acquire GSKY in an all-stock transaction valued at ~$2.24B. The closing of this transaction is anticipated in Q4 2021 or Q1 2022.
GSKY is the largest fintech platform for home improvement consumer loan originations. GS's rationale for this acquisition is to capitalize on GSKY's differentiated lending capabilities and market-leading merchant and consumer ecosystem. This acquisition is expected to accelerate GS's efforts to create a consumer banking platform that will help drive higher and more durable returns.
It is a Georgia-based fintech company that provides buy now, pay later (BNPL) solutions to merchants, enabling them to expand payment options for their customers and increase sales. It maintains a network of more than 10,000 merchants and 4 million customers that have financed more than $30B of purchases. The company estimates it will see transaction volumes of $6.2B - $6.5B in 2021.
The company went public at a valuation of $4.28B in May 2018 and posted revenue of $525.6 million in FY2020 and $261.7 million in the first 6 months of FY2021. Further details about the company are found in the FY2020 10-K and Q2 2021 10-Q.
Goldman Sachs - Stock Analysis - Financials
On October 15, 2021, GS released Q3 and YTD 2021 results. Details are found in Form 8-K and Earnings Presentation.
GS - Q3 2021 Results Snapshot
GS's CFO typically provides commentary on the quarterly and YTD results in a brief video within the Daily Check-In section of GS's site. At the time of writing this post, however, the only video related to Q3 2021 results is that of GS's global head of Investor Relations who shares the topics she is discussing with investors which include the continued strength and diversity of GS's client franchise and the progress in driving the durability of earnings.
Goldman Sachs - Stock Analysis - Credit Ratings
GS's credit ratings can be found in the Credit Profile (page 5) of this Investor Overview.
Ratings for several GS entities are reflected on this credit profile. The ratings of interest to me are the senior unsecured long-term debt ratings for The Goldman Sachs Group, Inc. as this is the entity whose shares trade publicly.
- Moody's assigns an A2 rating; the credit outlook is stable after having been upgraded from A3 on January 27, 2021.
- S&P Global assigns a BBB+ rating; this was last reviewed on May 24, 2021 and the credit outlook is stable.
- Fitch assigns an A rating; this was last reviewed on October 4, 2021 and the credit outlook is stable.
The Moody's and Fitch ratings are the middle tier of the upper-medium grade investment-grade category. The rating assigned by S&P is two notches lower at the top tier of the lower-medium grade investment-grade category.
Moody's and Fitch define GS as having a STRONG capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
S&P Global defines GS as having an ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
Despite the variance in ratings, all 3 ratings are satisfactory for my purposes.
Dividend and Dividend Yield
In Q3, GS returned $0.7B of common stock dividends to shareholders.
On October 13, 2021, GS's Board of Directors declared a $2.00 common share dividend to be paid on December 30, 2021 to common shareholders of record on December 2, 2021.
GS does not maintain a dividend history on its website but this history is accessible here.
Further details on this subject matter are found in my July 28, 2021 post. When I wrote that post, GS shares were trading at ~$375 and the $2/quartely dividend yielded ~2.13%.
Following the release of strong Q3 2021 results, GS's share price has risen to ~$400 thus resulting in a ~2% dividend yield.
GS has 4 billion authorized shares of common stock and 200 million authorized shares of nonvoting common stock. The firm’s share repurchase program is intended to help maintain the appropriate level of common equity.
The share repurchase program is effected primarily through regular open-market purchases with the amounts and timing determined primarily by GS's current and projected capital position, and capital deployment. These purchases may also be influenced by general market conditions and the prevailing price and trading volumes of the common stock.
GS suspended stock repurchases from Q1 2020 through to Q4 2020. Stock repurchases resumed in Q1 2021.
GS has been a prolific buyer of its issued and outstanding shares over the years with the FY2009 - FY2020 weighted average number of diluted shares outstanding (in millions) being 550.9, 585.3, 556.9, 516.1, 499.6, 473.2, 458.6, 435.1, 409.1, 390.2, 375.5, and 360.3. For the 9 months ending September 30, 2021, this was further reduced to 356.9.
In the first 6 months of the current fiscal year, GS returned $3.7B to shareholders in the form of common share repurchases. This was followed up by the return of an additional $1B of common share repurchases (2.5 million shares at an average cost of $395.28) in Q3.
Goldman Sachs - Stock Analysis - Valuation
At the time of my July 28, 2021 post, GS was trading at ~$375 and in the first half of FY2021, it generated $33.64 in diluted EPS. Management does not provide guidance so using the forward-adjusted diluted PE guidance available from the trading platforms of the 2 discount brokerage firms I use, I arrived at the following:
- FY2021: 22 brokers, mean estimate $53.14, low/high range $48.39 - $60. Valuation using mean estimate is ~7 and ~6.25 using the high end of the range.
- FY2022: 22 brokers, mean estimate $37.31, low/high range $32.98 - $41.50. Valuation using mean estimate is ~10 and ~9 using the high end of the range.
- FY2023: 11 brokers, mean estimate $39.53, low/high range $34.37 - $43.70. Valuation using mean estimate is ~9.5 and ~8.6 using the high end of the range.
GS has just released Q3 and YTD2021 results so the following brokers' earnings estimates will likely change in the coming days. For the moment, however, these are the adjusted diluted PE estimates based on the current $400 share price:
- FY2021: 28 brokers, mean estimate $53.59, low/high range $48.66 - $58.63. Valuation using mean estimate is ~7.46 and ~6.82 using the high end of the range.
- FY2022: 28 brokers, mean estimate $38.04, low/high range $32.98 - $43.82. Valuation using mean estimate is ~10.5 and ~9.1 using the high end of the range.
- FY2023: 15 brokers, mean estimate $40.79, low/high range $34.37 - $46.05. Valuation using mean estimate is ~9.8 and ~8.7 using the high end of the range.
Shares are slightly less attractively valued than at the time of my July 28, 2021 post. Despite this, shares appear to be reasonably valued given GS's long-term outlook.
Goldman Sachs - Stock Analysis - Final Thoughts
Historically, GS's earnings were somewhat volatile. Following David Solomon's succession of Lloyd Blankfein as Chairman and CEO, GS is actively working to reduce this volatility. Examples of this include the July 26th announcement that GS Transaction Banking will streamline supplier payments made via B2B accounts payable solutions offered by Fiserv and the impending GreenSky transaction discussed earlier.
Given my opinion that a broad market pullback is not out of the realm of possibility, I do not intend to add to my GS position at the moment. I am, however, receptive to adding to my GS exposure if the share price experiences a pullback and more attractive opportunities do not present themselves.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long GS.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
