Goldman Profits on Subprime Shorts, Beats Targets

Dec.18.07 | About: Goldman Sachs (GS)

Wall Street investment bank Goldman Sachs (NYSE:GS) topped analyst estimates for the eighth straight quarter Tuesday, as it cashed in on credit-market shorts. It also reiterated its focus on effective risk management. Shares climbed 2.1% in pre-market trading, but fell throughout the day after the firm warned analysts of short-term weakness in the markets (Goldman, I-Banks Drop on Firm's 'Horrible' November). Q4 earnings were $3.22 billion ($7.01/share), up from $2.85 billion ($6.13) a year ago. Revenue climbed 14% to $10.74 billion, but fell 13% from last quarter's $12.33 billion.

By segment, financial advisory revenue jumped 98% to $1.2 billion leading its investment banking segment to a 47% revenue gain of $1.97 billion. Trading and investment revenue was up 4% including a 9% gain in equities trading and a whopping 127% ($734 million) gain in "other corporate and real estate gains and losses" as Goldman cashed-in by shorting slumping housing and residential lending markets. Both Lehman (LEH) and Goldman have reported net short exposure to the subprime mortgage market. Asset management revenue was up 29% to $1.84 billion. "Looking forward," CEO Lloyd Blankfein said, "we continue to see significant growth opportunities across the global economy," (full earnings call transcript later today).

"Goldman has successfully managed risk... and we believe its star is set to shine for years to come," Morningstar analyst Ryan Lentell said in a recent note. "Unlike most of the other major investment banks, Goldman has avoided any major missteps in the credit markets."

Rivals Morgan Stanley (NYSE:MS) and Bear Stearns (NYSE:BSC) report Q4 earnings Wednesday and Thursday respectively. Last week, Lehman Bros. topped estimates, but overall revenue and earnings fell (full story). Goldman shares finished down 3.4%.

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