Is GSAM Underappreciated by Wall Street?

Goldman Sachs (GS-NYSE) certainly seems to be escaping many of the problems bedeviling its peers, and make no mistake about it, they will pick up market share from their faltering rivals in areas like Prime Brokerage and investment banking. Their traditional strength in commodities in also helping, and remarkably they have been in the open market, buying back stock.

With regulators ready to pull the plug on the temporary lending facilities, the weaker brokers will have to scramble to boost liquidity above recent historical levels. Lehman last tapped the lending facility on April 15th, but with Robert Steel indicating the window would be shut by roughly Halloween, at the latest, Goldman's peers are panting. Rivals are de-levering at the worst time possible, and are certain to fall further behind Goldman, who are operating from a position of strength. Sell when you can, not when you have to.

But somewhat lost in the shuffle is Goldman Sachs Asset Management (GSAM). Certainly they have had some issues with their underperforming Global Alpha hedge fund, but it is a drop in the bucket if you look at the big picture.

Asset Management achieved record quarterly management and other fees of $1.15 billion. Assets under management increased 18% from a year ago to a record $895 billion, including an increase of $22 billion during the quarter. Goldman Press Release

How much of Goldman's current equity market capitalization is attributable to GSAM?

Glad you asked, and I have a flimsy back of the envelope approach that might help you value Goldman on a sum of the parts basis.

It is interesting to compare GSAM to Legg Mason (LM-NYSE) at this time. Of course, GSAM is growing while Legg Mason continues to suffer redemptions, but assets under management are roughly equal at this time, a little north of $900 billion, and revenues too, although it would appear Goldman’s mix is probably helped by their alternative assets, which can offer a boon if the hedge funds in the stable begin to fire on all cylinders.

With Legg Mason sporting an equity market cap of approximately $7-8 billion, GSAM is arguably worth at least $13 to $15 billion. The division will likely be managing $1 trillion by the end of the year, and their asset gathering efforts are still taking shape. Legg Mason’s market cap was in this neighborhood ($13-$15 B) 18 months ago before a host of problems led to redemptions, and the Street threw in the towel. And Legg Mason’s hedge fund expertise pales next to Goldman, who tapped a team of prop traders to bolster their alternative lineup, and should garner a higher valuation than plain vanilla strategies.

GSAM probably accounts for 20% of Goldman’s current equity market cap of $70 billion, You could go the various business lines. such as M&A ,etc, and come up with your own conclusions in a sum of the parts approach.

But I think that the Asset Management operations at the brokers are generally overlooked and underappreciated. Lehman’s ownership of Neuberger Berman was rarely mentioned as people feared the stock was possibly going to zero, and even firms such as William Blair now have Asset Management arms that rival the traditional brokerage operations.

Bear Stearn’s never really built a formidable platform, and Lehman might only part with Neuberger & Berman under the most dire circumstances. Goldman’s division is probably underappreciated, however, and provides a steady stream of cash flow and profits. Chances are by 2013 Goldman will be managing at least $2 trillion as they sink their tentacles into the growing pools of wealth outside of the U.S., and their asset gathering capabilities gain steam.

In my formative years I would root against the New York Yankees until I was blue in the face. It was largely a futile exercise, much like waiting for Goldman to stumble.

And if you think these numbers are impressive, given the environment, just wait until the cycle turns. We ain’t seen nothing yet, as Goldman redefines the brokerage model, and, along with clients like Citadel, who helped contribute to a a 30 percent increase in Goldman’s securities services business, leave everyone in the dust.
__________________________________________________________

Update: If you had any doubt about the brokers getting liquid ahead of the borrowing window for brokers shutting, this should tell all you need to know:

The company’s global core excess liquidity, a pool of cash and liquid securities, jumped to an average of $88 billion in the quarter from about $64 billion in the first quarter and is probably the highest ever, Viniar said.

Goldman also de-levered more than they said they would three months ago, when Viniar claimed that would essentially stand pat. No firesale by any means, but some CFO’s are villfied for playing the game, and making the buyside read through the lines and figure it out for themselves. You can’t show your cards, but some people sure can make a lot of noise about the ones they hold when a pot is at stake. Of course, Viniar won’t get fired for bluffing.

Goldman Beats Estimates on Brokerage, Commodities
Bloomberg
________________________________________________________

Goldman Sachs reports Second Quarter earnings per common share of $4.58
Release (PDF)

----------------------------------------------------------------------------------------------------------------------
The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

Comments:

<< Back to main