Goldman Sachs Earnings Exceed Expectations

Francisco Bermea's picture

Tuesday, July 14, 2009 - 11:11am

by Francisco Bermea

Goldman Sachs (NYSE: GS) earned a record $3.4 billion in the second quarter, setting a record and handily exceeding even the most optimistic forecasts.

The results were +64.5% higher than a year ago, illustrating how quickly the investment bank has recovered from the worst financial crisis since the Great Depression.

Goldman's earnings, which amounted to $4.93 a share, trumped not only Wall Street's $3.65 consensus forecast but also exceeded star banking analyst Meredith Whitney's prognostications. Whitney predicted earnings of $4.65 a share yesterday and rated Goldman's shares a "buy," the only such recommendation among the eight banks she covers.

Trading net revenue -- 10.78 billion -- increased +93% from a year ago. Goldman's underwriting business rose +21% versus second quarter 2008.

Goldman's return on equity, a key measure of an investment bank's performance, was 23% during the quarter. It now stands at 18.3% for the first half of 2009.

Reduced competition from rivals like Lehman Brothers and Bear Stearns helped bolster trading revenue. So did a renewed appetite for risk. Goldman's has "unmatched risk-taking/risk-management skills," Bank of America analyst Guy Moszkowski said.

Goldman's ability to earn billions trading may be in jeopardy. Prosecutors allege a copy of the firm's proprietary software, which enables it carry out sophisticated, high-volume trades, was stolen by a former employee. Though the software cost millions to develop, the firm fears it will lose its competitive advantage if the blueprint for its trading strategy becomes known to a competitor.

Goldman's second-quarter results included a one-time preferred dividend of $426 million that the firm paid to the government, which provided $10 billion to Goldman on Oct. 2008 as part of its efforts to bail out the struggling financial sector. The government no longer has any ownership in -- nor say over -- Goldman's business, including its executive compensation. Goldman repaid the bailout money on June 17.

Whitney predicts Goldman shares will reach $186 within 12 months, a +24% increase from current levels. Whitney was one few analyst who foresaw the financial crisis.

Francisco Bermea does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.