It’s Dangerous To Bet Against Goldman Sachs

As the market grinds through what looks to be a relatively slow, consolidation day, I took a couple hours this morning to review the quarterly earnings a bunch of investment banks released this week. 

Overall, Goldman’s earnings came in remarkably strong, Bear’s were notably weak and Lehman’s came in somewhere in the middle.

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Let’s start with the most important stock on the planet, that legend of American and worldwide finance: Goldman Sachs (GS).  When markets are functioning, Goldman Sachs makes a lot of money.  When they’re not, it makes ….. a lot of money. 

So how did they do this quarter?

Duh!!!  Trick question!!!  They made a lot of money!!!  (FY 3Q Earnings Release)

Net revenues were up 63% from the year ago quarter and net income 80%!

Financial Advisory, Fixed Income, Currency and Commodities (FICC) and Equities Trading led the way with monster quarters.  Revenues in those segments increased 132%, 71% and 154%, respectively.  (The latter two segments are a bit of a black box, coming from Goldman’s trading for its own account, and I don’t think anybody really understands what they’re doing here to make so much money).

Debt underwriting was weak, as we all know, down 8% from a year ago and 42% sequentially, but because it makes up only about 3% of Goldman’s business it really doesn’t show up in the overall numbers.

From this report, it appears that Goldman is still firing on all cylinders.

Its stock is now up more than 30% from the lows hit a month ago on Thursday August 16 (chart) and only about 12% below its high for the year.

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Things were a little different at Lehman (LEH) and Bear Stearns (BSC), who are traditionally more concentrated on the fixed income markets.

Lehman reported a decent quarter, all things considered (FY 3Q Earnings Release). 

Overall revenues were up 3% and net income down 3%.

But their results certainly showed the impact from the current credit market turmoil in a way that Goldman Sachs didn’t.  In the biggest part of their business, Capital Markets: Fixed Income, revenues were down 47%!

But the rest of their businesses held up nicely, including excellent quarters from Capital Markets: Equities and Advisory Services, which allowed them to report a solid quarter.

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Bear Stearns, not surprisingly, was hardest hit by the fallout in the credit markets (FY 3Q Earnings Release).

Total revenues at Bear were down 38%, driven by an 88% decline in Capital Markets: Fixed Income, the biggest part of their business, revenue.

Also causing problems for Bear was the blowup of their two mortgage backed securities hedge funds, one of the biggest stories in recent months.  They took a $200 million charge on these (is that going to be enough???) which resulted in a net revenues of -$186 million for the quarter – compared to $184 million in the year ago quarter.

Net income was down 62% from the year ago quarter!  That said they still managed to turn a profit of $1.16 a share which ain’t bad.

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Overall, I think these numbers are pretty positive.  Even Lehman and Bear, which were hard hit, still reported solid profitability. 

The question now becomes: Is this the bottom or the beginning of the troubles for the investment banks?

UPDATE (Fri 9/21/07, 10:30am): The Wall Street Journal’s review of this weeks investment bank earnings, “Brokers’ Head-Scratcher” (subscription required), reads pretty much like my post above. 

• Goldman was strong, Bear was weak.  Lehman and Morgan were somewhere in the middle.
• Overall the results were well received because it seems like the i-banks are weathering the storm: “The bottom line is that despite the mixed bag of results, investors got pretty much what they wanted: assurance that the firms are weathering the credit market storm.”
• The question is whether this is the bottom or just the beginning of the bad news.