On Wall Street, market participants are represented by two separate, yet equally important groups: the “buy side,” which invests client assets in securities, and the “sell side,” which executes trades and underwrites stock and bond offerings.
BlackRock Inc. (BLK), the largest buy-side firm, with $4.3 trillion in managed assets, and Goldman Sachs Group Inc. (GS), the top sell-side firm, both reported sturdy profits Thursday – and in a statistical coincidence, they put up rather similar per-share earnings for the fourth quarter and full-year 2013.
In a sign of which business investors have greater trust and belief in at the moment, each dollar per share of BlackRock’s earnings is valued by the market at 70% more than a dollar of Goldman’s earnings.
BlackRock reported $4.86 per share in fourth-quarter earnings and $16.58 for the full-year 2013. Goldman, overcoming a soft bond-trading environment with some tight control over compensation expenses, earned $4.60 per share last quarter, about 40 cents better than forecasts, and $15.46 a share for the year.
Similar bottom lines, stark share differences
Those similar per-share bottom lines make stark the variance in these New York financial giants’ share prices: BlackRock stock trades near $320, or some 19.3-times its 2013 profits, versus Goldman’s around $175, or 11.3-times last year’s earnings. BlackRock shares are up more than 1% in midday trade following its earnings release, while Goldman stock is down around 2%.
(Goldman remains the far larger company, with nearly three times as many shares outstanding and a market value of $85 billion compared to BlackRock’s $56 billion.)
There’s nothing particularly new about the fact that global banks such as Goldman tend to trade at a discount to the broad market and to other categories of financial firms.
Goldman runs a large leveraged balance sheet, its results are fairly volatile and based on mercurial trading flows, and regulators have forced all big banks to hold more capital and pull out of some profitable trading businesses. The firm posted a return on equity – an important gauge of profitability for investment banks – of 11% for 2013, up a bit from last year but still perhaps a third of its ROE in the boom years of the mid-2000s, when hot trading markets and much higher use of borrowed funds by Goldman amplified returns.
Money management, by contrast, is a fabulous business – even more so for a company of BlackRock’s vast scale to reap huge efficiencies.
Initially an institutional bond manager, BlackRock has opportunistically bulked up at the expense of sell-side competitors in recent years, acquiring Merrill Lynch Investment Management and then the iShares exchange-traded funds business from Barclays PLC (BCS). The firm’s profit margin is around 40%.
What makes the comparison a bit more interesting is that Goldman is also in the money-management business, its Goldman Sachs Asset Management division overseeing a bit more than $1 trillion for wealthy individuals and institutions, as of Dec. 31.
That means Goldman has just under a quarter of BlackRock’s managed assets. Its 2013 revenue in asset management was closer to half BlackRock’s total revenue, as Goldman runs more high-touch strategies such as hedge funds, and counts much of its wealth-advisory revenues as part of investment management.
Still, without suggesting Goldman’s asset manager is remotely as profitable or as dominant a franchise as BlackRock’s, this represents some obscured value from a lower-risk business within Goldman. The market has rarely given Goldman “credit” for this in its share price, but this should at least provide some ballast for the firm’s long-term financial results.
Meantime, Goldman seems to be fully adjusting to the new regulatory and economic realities, going from the firm that paid its employees most lavishly to the one that's compressed compensation levels to better fit its revenue profile. As the Wall Street Journal points out, its emphasis on paying bonuses in Goldman stock has provided a nice windfall in the past year as Goldman shares rallied nicely – but of course that was never guaranteed.
While the firm is never likely to return to the profit bonanza of the credit-boom years, Goldman appears well positioned to remain a leader in a more subdued securities industry – mediating global capital flows, taking companies public and topping the rankings of merger advisors. And, best of all, the firm seems finally to have become a lesser target of the “Law & Order”-style prosecutorial crowd who have been busy for years mopping up pre-crisis financial practices.