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:
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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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