Quarterly earnings are a mixed bag: part informative, part absolutely useless.
Iconic investment bank Goldman Sachs (GS 1.27%) reported some pretty interesting earnings yesterday. On the surface, things looked absolutely stunning, but when the stock price didn't budge, investors quickly realized there wasn't much to celebrate.
However, while there were no "Yippee!" moments from the report, it looks like the company is focused on rebuilding its reputation and establishing itself as a conservative, responsible investment bank. Let's take a closer look at the discussion with management to make a more accurate assessment of Goldman's condition.
The surface
Goldman Sachs had a respectable quarter, overall. Bottom line profit for the third quarter was a healthy $1.5 billion, compared to a disheartening loss the year before. The company handily beat estimates at $2.85 in earnings per share, a solid $0.66 ahead of analysts' estimates.
Digging in, Goldman posted some less-than-stellar info in its underwriting of stocks and bonds compared to a year ago. Equity underwriting activity was down a few points, along with decreased investment banking revenues, and overall IPO activity seemed a good bit lower than the year before. Goldman's big money maker, as usual, was its Institutional Client Services, which brought over $4 billion during the quarter for the company.
It was a low bar to jump over for Goldman, with its dismal 2011 third quarter, and the company made a mighty leap over it, but the conference call was not a celebration.
And beneath
Many have been talking about Goldman's layoff initiatives, including its management. From the second quarter, though, total head count was basically the same at 32,600 people. Compensation expense still managed to double from last year (Wall Street...), but other cost-cutting initiatives seemed to save around 10% since last year. The company's overall expense reduction initiative is now aimed at nearly $2 billion, up from $1.2. One would think doubling the amount you pay your workers would be the opposite direction of savings, but on a percent of revenue basis, compensation had held steady at roughly 44%.
With the way the company is going about cutting back, much of it headcount related, some of the gains are currently unrealized but should show up on the P&Ls by the end of the year because of final salary payments. If you were expecting more encouraging bottom lines across all departments, know that these numbers will improve by next quarter.
As far as being a conservative investment bank, Goldman seems to be playing the part well. Most investors know now that Goldman's balance sheet is in near record shape in the liquidity department. As the company continues to reduce its exposure to high-risk practices, we may see the tremendous liquidity tick back down so the company can take advantage of more opportunities.
To me, the company looks to be biding its time, not taking any excessive risks, not maximizing the profit potential of many of its divisions, and just all around trying to build back some of that lost confidence over the last few years. In fact, the management team's rather muted responses and constant focus on conservative actions was a breath of fresh air -- not like the usual CEO speech about how great things are going.
Mr. Market isn't listening
The market, in general, didn't seem to care much one way or another about Goldman's report. Just a bit of time after they released earnings, Citigroup's (C 1.17%) CEO Vikram Pandit announced he was hitting the road, done with this banking chief nonsense. According to the stock price, which ticked up a few points at several times during the trading session, investors were glad to say goodbye to the man who really did a decent job even through a terrible crisis. Citigroup closed up nearly 1.6%, while Goldman was down around a point.
To me, with a forward earnings ratio of 9.79 and a extremely conservative appearance, Goldman might be a decent buy right now. The company could, in the near future, put to work some of its capital, monetize its private equity investments, and really shift into gear if they wanted to impress investors and analysts. The fact that they haven't done this already suggests that management is more concerned with long term results -- which is much more attractive to me, given its current low valuation.
Some have said recently that investing in banks has become like investing in airlines -- impossible to make money. I don't quite agree with that, but it is a difficult sector for those not well-versed in the business. Make sure to do your research if you are considering opening a position.
