These two are financial icons on wall street. GS is the gold standard while LEH is a growing competitor. Both highly leveraged. Yet GS remains the crown.
LEH has lower price to book and price to sales, however GS has higher price to cash flow and slightly better P/E, indicating GS's higher profit margin (14% vs 8%) and earning power. Not surprisingly, GS has an excellent ROE of 32% vs LEH's 23%.
GS has more than double income per employee than LEH which is industry normal. LEH do have a higher revenue per employee than industry average.
LEH has a gross profit of 75% (vs. GS's 65%), yet it's final profit margin is only 8.18% (vs. GS's 14% which is industry average). This indicates LEH has something go sideway during the profit chain. Investigating the income statements found that "interest and related expense" is the cause. LEH has roughly the same expense as GS in this item while revenue is about 35% less. With this industry where net profit margin is relatively thin, such thing can make a big difference. It may be due to the fact GS can borrow money on a lower cost.. Both rated AAA but somehow GS can borrow cheap money it seems… Not sure how much LEH can do better here.
Conclusion: GS is still the king of wall street and should buy more after 20 share of $200. Expect more than 5-7% better than index return for 2007. LEH has room to improve. If it improves its operation efficiency, the stock can do much better.
-- Update 08/23 --
During the sub-prime mortgage crisis, all financial stocks are hit hard. GS and LEH are no exception. That has created excellent buying opportunity. Yet I didn't because I don't have enough cash and when I have, I'll buy AAPL calls.
FDX $112.71 and UPS $71.47
Just opened overnight shipping in China. This seems like a good opportunity to me. Unlike US where business may still locate in rural area, in China almost every business located within major cities. I see delivery inside cities more challenging than between cities.
FDX has a price to sales of 1 and price to book of 2.82. It's amazing. Considering intangible assets only counts as $3B and Fedex's brand should worth a lot more, the price to book should be much lower. FDX is a buy from valuation perspective. UPS has price to sales of 1.6 and price to book of 4.64, also great, but not as good as FDX.
UPS, however, has better earning power. With a lower gross profit (17.75% vs 26%), UPS can achieve a higher profit margin of near 9% vs FDX's near 5%. This has helped its ROE to be 25%+ compared to FDX's 13% to 16%. UPS thus can achieve higher income per employee than FDX with lower revenue per employee.
FDX may be a good long term investment. So does UPS.
COH $50.96
Coach is an "affordable luxury" brand and has done extremely well. I feel so bad that discover it so late. The fundamental is outstanding. With virtually no debt (1% D/E ratio) and a high profit margin of 24.1%, COH posts an astonishing 40% ROE. However its valuation has been quite high. With PE of 33.4, investors are looking for 33% year-over-year growth which is somewhat unrealistic within the market segment at this moment. Other valuation metrics like price to book is not that important since COH is a fast growing company and it's the ROE and PE should be focused on.
Need to back check back. Expect slightly better than index return in 2007.
XTO $54.14
What stands out is its amazing profitability. With almost 80% gross margin and 35% net margin, the operating efficiency is evident. ROE is on par with the whole industry for about 35%. XTO is more leveraged than the industry average. I'm not worried about this given the fact it's still fast growing.
This industry's profit relies heavily on the energy price. So hedging such risk using derivatives is typical. That also limits the profitability unfortunately. So for XTO to beat expectation, the figure needs to come from volume. One thing better for XTO is it only operates inside US, a much less risky place than Middle East.
Projected from previous 5 year record, XTO should have more up side. Expect 5% or so more than index return in 2007.
COP $90
Attractive valuation. Buffet bought in 2006.
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