This year has been a really interesting time for financial stocks indeed.
Most of them have had their stock price literally destroyed, a few are no more, fewer are astonishingly at their high. Generally it has been a very tough time for every company operating in the sector. Some of them however has faced the storm in a privileged position, so that are showing a better (price) shape at this time.
Take the Almighty Goldman (GS). Encircled by universal admiration, it has seen its share price barely punished by the worst market ever for financials. From last October to present day it has lost 32.5%, a very good performance if you compare to the sector’s index, a stellar performance if you compare it to other peers or financial insurers, down even 70-80%.
Financial insurers could be very well a good subject for another article, or you can rely on this excellent piece, so I’ll pass over them today. But take for example Regions Financial (RF), whose share price has been curtailed nearly 70% in the same period. Why this enormous difference in their performance? You’d think it’s a function of their operating performance or other real world reasons.
Alas, I’m afraid it’s just a function of the market schizophrenia I talked about in my last report.
The perception about the operating performance of Goldman is very good; everybody and his wife talk about how smart and dandy this guy is. I guess they refer to the shorting of the very crap it was at the same time selling to its clients. Ethics aside, it’s true that Goldman earnings have been very solid, even in this tough times. It’s also true however that even Regions earnings performance has been very good; in the last 5 fiscal years to 2007 it earned north of five billions $, never showing a loss, not even in this year first half (opposite, it earned a healthy 540 millions $).
So maybe it’s because of an untenable leverage of Regions’ balance sheet. But wait, its leverage is 7.2, not the end of the world for a bank I’d say. An untenable leverage seems rather what Goldman presents: its assets are 24 times equity. And I don’t think that all the crap is on the Regions’ assets side, while all the pearls are on the Goldman one.
Why then that different share performance? Why the market thinks it’s right to value Regions 0.32 times the book, while Goldman deserves a rich 1.6 times book?
Apart from some obvious differences in their business (I’d think anyway that put more risk on the Goldman side), they in the real world differ just in one thing. That is, in the last 22 quarters (5.5 years) Regions has delivered almost 9 billions $ of free cash to the shareholders (it now capitalize just two third of that figure), while Goldman operations in the same period have used nearly 170 billions $. Yes, you read it right: while Goldman posted exceptional profits, its operations bled 170 billions $ of cash in five years and half.
(someone someday will explain how that’s possible, and I think he will turn to metaphysic)
So I must confess to be at complete loss here.
Disclosure: no personal positions, RF is a pick of my model portfolios.
Tags: Equity Analysis
