Part of the Fool's mission is to continue to update investors on the companies they're interested in. As part of that mission to educate, we bring you this series of "Revisited," where we go back to recent SEC filings to dig in deep so you don't have to.
"Lunch? Aw, you gotta be kidding. Lunch is for wimps."
That quote was from the intractable Gordon Gekko from Ollie Stone's Wall Street. While the '80s may be over -- and Gekko and his go-get-'em protege, Bud Fox, are fictional -- Wall Street today isn't wanting for Masters of the Universe or young up-and-comers looking to take home the big bucks.
As far as launching pads go, Goldman Sachs
The success that Goldman has seen as a firm, then, is of little surprise, since it's largely human and intellectual capital that drives the I-banks. Recently, Goldman's intellectual capital has met an oncoming front of rising equity markets, high levels of corporate financing activity, and robust credit markets. The results have been eye-opening.
Wall Street doesn't care about the past
OK, it's true, Wall Street tends to discount past performance. It continually asks, "Yeah, but what have you done for me lately?" All the same, I thought we'd take a quick look back at the financials Goldman has recently delivered.
Between fiscal 2002 and 2006, Goldman nearly tripled revenue, and it grew EPS almost fivefold. Far from slowing, fiscal 2006 showed growth rates and margins up noticeably from the prior year. Growth came across Goldman's divisions, with its investment banking group leading the charge and improving its top line 53%, while boosting pre-tax margins from 11% to 28%. The largest and most profitable of Goldman's divisions, trading and principal investments, grew 52%, and asset management rounded out its year by adding 36%.
For the year, Goldman earned $19.69 per share, up 76% from 2005. The profit was a return of 33% on common shareholder equity. This was all against a backdrop of some very accommodating market conditions. Though the equity markets took a nasty dip midway through the year, a strong recovery in the second half of the year left the S&P up 12% for 2006. Credit markets stayed strong through the year, even as the housing market tried to hit the skids. And the deal-making business came up in spades.
It's the economy, stupid
That was 2006.
Economy-wise, the new year has not exactly started with a flourish. Let's see, the housing market has continued to sink, defaults on subprime loans jumped and lenders are getting squished, U.S. equity markets have been shaky at best, and Asian markets have given us reason to be concerned. When Goldman, Lehman
If the brokerage houses are anything, they're a play on economic strength. The economy and equity markets have been accommodating over the last four years, but some early signs point to an easing off on the gas a bit in 2007. That's not to say we're going from a Joan Jett "I Love Rock and Roll" market to a Muddy Waters "Standing Around Crying" market, but it does look like we may be playing some slow(er)-hand-style Eric Clapton this year.
As Goldman's CFO, David Viniar, covered in the first-quarter conference call, the fundamentals of the economy are currently positive, and credit markets as yet are not showing signs of subprime contamination. I can't argue with that. Sure, Greenspan says we've got a 1-in-3 chance of going into recession this year, but give him a week -- he seems to change his mind a lot. Right now, at a trailing P/E of right around 10, Goldman's stock has some room to run in an upside and some built-in cushion for the downside.
As Goldman continues to dig in to 2007, I'll leave you with a closing remark from our pal Gordon Gekko: "And if you need a friend, get a dog. It's trench warfare out there, pal."
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Fool contributor Matt Koppenheffer always eats lunch, no matter what Gekko says. He owns shares of Goldman Sachs, but does not own shares of any of the other companies mentioned. The Fool's disclosure policy is here to keep you safe from all the Gekkos of the world.
