Goldman's Profit Explosion

What company wouldn't be thrilled with $3.15 billion in profits, especially when it's a 93% increase over the past year? Well, shareholders of this company -- Goldman Sachs (NYSE: GS  ) -- were actually disappointed, because the stock price slid $1.62 to $200.90. Then again, over the past year, the company's stock has soared nearly 60%. The good news is that, as long as bullish times remain strong, Goldman will likely continue to post stand-out fundamentals, as should other premier financial powerhouses like Lehman (NYSE: LEH  ) , Merrill Lynch (NYSE: MER  ) , and Morgan Stanley (NYSE: MS  ) .

In the fiscal fourth quarter, Goldman's net revenues surged 47% to $9.41 billion. Moreover, the company has been highly efficient with its capital; its return on equity is about 41.5%, which compares to 25.2% in the same period a year ago.

Goldman's top-notch traders have become the biggest driver of its growth. In the fourth quarter, net revenues from FICC (fixed income, currency, and commodities) trading increased 58% to $3.1 billion; the firm is enjoying considerable success investing in distressed situations. Furthermore, there was a 52% increase in equities trading to $2.13 billion, boosted by a surge in the U.S. stock markets.

Goldman is also reaping enormous benefits from major investments in various companies. For example, it earned $949 million from its equity position in Commercial Bank of China Limited, a large Chinese bank that recently had a high-profile IPO.

Oddly enough, the traditional business of Goldman -- investment banking -- often gets overshadowed. Unfortunately, the fourth quarter wasn't its strongest, as it grew only 4% sequentially to $1.34 billion. But with the continued growth in M&A activity and the recent pickup in IPOs, this segment should see improvement. On the conference call, Goldman's CFO, David Viniar, indicated that the investment banking backlog is the biggest since 2000. (That may be an easier comparison than it initially seems; didn't we go into a bear market in 2001?)

What's more, Goldman's asset management business was underwhelming. Revenues increased 16% in the fourth quarter to $1.43 billion, but there was a 2% decline in sequential growth.

The problem may lie in Goldman's $10 billion hedge fund, Global Alpha, which is down roughly 11% this year. Goldman has recently been on a hiring spree to nab top-notch hedge fund traders in hopes of correcting that slide.

Goldman is essentially a proxy for the hot sectors of Wall Street: investment advisory, trading, hedge funds and leverage buyouts. It's tough for individual investors to participate in these areas, but investing in Goldman Sachs is one way to get some exposure to them.

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Fool contributor Tom Taulli does not own shares mentioned in this article.He is currently ranked 292 out of 16,877 players of Motley Fool CAPS, the Fool's new community intelligence stock-picking service.


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