Goldman Sachs (NYSE:GS) had another whopping quarter, beating every Street estimate I saw. The company posted EPS of $4.93, 42% higher than consensus. While earnings were expected to decline year over year, they actually rose 8%. Revenue was equally as strong, coming in at $13.76 billion, which is up 46% vs. the year-ago period.
The company's actual earning power is astounding. To wit, if you exclude the $426 million TARP dividend payment, diluted earnings would have been $5.71. I saw one analyst who had 2010 EPS estimates near $20. If this quarter's level of earnings is sustainable, it is easy to see the company surpassing that target, which would likely propel the stock to much higher levels.
Trading and principal investments, its largest segment, was the largest driver of results (up 51% quarter over quarter). Fixed income, currencies, and commodities posted solid growth, with strength in credit products and currencies. Equities trading was huge, with revenue surging up 110% from last quarter. And principal investments, mainly its stake in ICBC, added $811 million. The only losses understandably came from commercial real estate loans (down $700 million) and principal real estate investments (down $500 million).
Investment banking revenue was also strong (up 75% quarter over quarter), driven by a surge in equity underwritings as companies looked to take advantage of rising equity prices to raise capital. Debt underwritings were also strong as municipalities did a lot of deals. The weak spot was lower M&A activity, as the transaction backlog decreased.
Below are some of the other key metrics reported each quarter:
- Annualized return on equity was 23.0% (impressive).
- Book value rose 8%, to $106.41.
- The Tier 1 capital ratio fell to 13.8% due to a $10 billion TARP repayment.
- Level 3 assets declined from $59 billion to $54 billion, down to 6.1% of assets.
- Average daily value at risk rose to $245 million, reflecting higher equity volatility.
- The comp and benefits ratio was slightly lower than last quarter at 49%.
- Total assets under management rose 6%, to $819 billion.
- The company is in talks with Treasury to buy back government warrants.
Goldman's core excess liquidity rose to $171 billion, prompting some to ask how the company plans to deploy greater capital given its position. Management replied that it wants to remain conservative with the company's capital given that we are still not out of the woods in terms of the investment landscape as well as new capital regulations that are still coming out. This also means that it is premature to start talking about a stock buyback.
Management said that the competitive environment remains "fragmented," and the company clearly took advantage of this. It is notable that headcount only declined by 1%, which leads me to believe that Goldman probably poached a lot of top talent that may have been displaced from other firms, or simply hired them away by being able to offer more attractive compensation. Management also said that the hedge fund redemption cycle looks to be over, which should be a big positive not just for Goldman Sachs, but for the markets overall as the fear of big liquidations should subside (maybe that's what the low VIX is signaling?).
This quarter has me scratching my head as to why I sold my positions. In truth, I was more worried about the market rolling over than Goldman Sachs missing estimates. But with the type of earnings power that the company just demonstrated, its increased competitive strength vs. competitors and the distressed investments I think it is likely to pursue in the near future, this is a stock I want to get back in and own.