With 2011 finally in the books, it's time to reflect on what has transpired this year and what companies could be facing business-altering decisions in 2012. On today's plate we have banking and financial services juggernaut Goldman Sachs (NYSE: GS ) .
But before we dig too deeply into what 2012 may have to offer, let's get a quick snapshot at how 2011 treated shareholders:
|2011 Stock Return
|Projected 5-Year Growth Rate
Source: Yahoo! Finance, TTM = trailing 12 months.
Last year was not a good year to be an investment bank by any means. The ongoing sovereign debt crisis in Europe and volatile stock markets around the globe crushed investment bank balance sheets and stymied growth of almost any kind. Not surprisingly, Goldman Sachs came very close to losing almost half of its value in 2011. But, these results are in the past. Let's look ahead and see what could be driving Goldman Sachs' stock price in 2012.
What to expect
Goldman Sachs' biggest enemy in 2012 will be global instability. Almost every aspect of its business took a hit in 2011. In its third-quarter earnings report, highlighted by only the second loss in company history since it went public in 1999, the bank noted sharp trading losses of $1 billion in stocks, another $1 billion in a stake in Commercial Bank of China, $907 million in bonds, a 33% drop in revenue from investment banking, and a 36% fall in fixed-income, currency, and commodity trading revenue. Altogether, revenue plunged 60%. All that, my friends, makes for an ugly quarter, and there's no way to sugarcoat it. If Goldman Sachs is to be successful in 2012, global markets will need to stabilize for its portfolio of investments to stand a chance.
Second, bonuses need to come way down if the bank continues to struggle. Despite the recent 24% drop to "just" $10 billion in compensation, Goldman is going to need to be more proactive and prudent with its cash in case global markets continue to remain as volatile as they were in 2011. The last time I checked, Europe wasn't exactly out of the woods yet. Sporting gross credit exposure of $4.2 billion to Europe's most at-risk nations, Goldman would be wise to tighten its bonus pool significantly in 2012.
Finally, Goldman Sachs needs to fix its PR mess, and there are a few ways it may be able to do that. First, it can attempt to shed its image as one of the most highly levered banks. Jeffries Group (NYSE: JEF ) has worked its way back into the good graces of Wall Street by reducing its leverage dramatically over previous quarters, and the market rewarded the stock with a 16% pop since reporting its results two weeks ago.
Another possibility is that the bank could use the cash saved from bonuses to reduce the amount of workers it's laying off globally. While nowhere near the same territory as Bank of America (NYSE: BAC ) , which is shedding up to 30,000 jobs in the coming years to save money in the wake of the Countrywide Financial scandal, Goldman Sachs' investment-banking layoffs could account for up to 20% of its workforce in that sector.
Goldman's status as an "on-again-off-again" bank made its business model very difficult to judge. At just 70% of book value, the company does begin to wet my whistle when it comes to value hunting, and it does have a strong history of profitability behind it. On the other hand, Goldman has often over-levered itself. Eventually that could prove (and it may have already proved) costly to shareholders. As of right now I'm taking a neutral approach to the stock in 2012, but concerns still remain about its ability to remain profitable in light of continued European instability.
What are your thoughts on Goldman Sachs heading into 2012? Share them in the comments section below, and consider adding Goldman Sachs to your free and personalized watchlist to keep track of the latest news with the company.
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