Merrill's Running of the Bull

For everything, there is a price -- including growth. If you're a financial company that really wants to supercharge your growth, often that means you have to take on some added risk to do so. So the question with Merrill Lynch (NYSE: MER  ) then becomes whether you have enough confidence in management to let this plan unfold.

By almost any standard, Merrill had a great quarter. Revenue was up 28% and well ahead of analyst guesstimates as all three businesses posted double-digit growth. Profitability was equally on fire as earnings (adjusted for a non-cash compensation expense) jumped 36%.

While the private client services business was something of a laggard, it still experienced 13% revenue growth and 27% pre-tax income growth. The investment management business, soon to be merged with BlackRock (NYSE: BLK  ) , had a great quarter as revenue rose 38% and earnings jumped 75% atop a 21% increase in assets under management.

Merrill's investment banking business is where things get a little stickier. Oh, the performance was great -- revenue was up 31% and income was up 41%. But I suspect that there will be some angst over the "how they made this money" part of the story. Revenue from principal transactions -- that is, putting the firm's own money at risk to trade stocks, bonds, etc. -- jumped 111% this quarter and was the leading source of revenue.

Now, that's great when you're making money. But the risk is that if your traders screw up, you can lose a lot of money. But you know what? This is a catch-22 for these companies. If they don't post superlative trading results, like say Bear Stearns (NYSE: BSC  ) , they get chastised. If they do post great results, like Merrill or Goldman Sachs (NYSE: GS  ) , they get sniped at for being hedge funds masquerading as companies.

These shares have already had a good run this past year. And while it's true that their strong brokerage and fee-based businesses might shelter them more when the markets cool off, it's equally true that Merrill still lags the likes of Goldman, Lehman Brothers (NYSE: LEH  ) , and Morgan Stanley (NYSE: MS  ) in the highly important return on equity metric.

Put that all together and I like this stock, but I'd rather wait for a brief bout of fear and loathing toward the sector before buying in with my own cash.

For more brokerage takes that won't leave you broke:

Want investment returns you can take to the bank? Mathew Emmert recommends stocks that pay generous dividends in hisMotley Fool Income Investornewsletter.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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