Goldman Sachs Rakes in Profits

By Brian Graney (TMF Panic)
September 21, 1999

Goldman Sachs Group (NYSE: GS) turned in fiscal Q3 earnings that were far ahead of expectations this morning, leaving the First Call mean profit estimate of $1.09 per share in the dust, with pro forma earnings of $1.31 per share. Total revenues ticked up 12% year-over-year to $6.4 billion while revenues net of interest expense ballooned 59% to $3.4 billion. The firm's net profit margin rose to 9.9% from 5.7% a year ago, driving annualized return on average equity to 31%, according to the company.

For the 130-year-old investment bank, this is about as good as it gets. The current global economic and financial scene is playing right into Goldman's core strengths, providing a dramatic contrast to the widespread financial turmoil that wrecked its results last fall. With the capital spigot for Internet and technology-related stock offerings still turned to full blast, the company's leading investment banking unit is raking in the dough. Revenues from underwriting increased 34% year-over-year and 9% sequentially to $534 million. Meanwhile, a healthy merger and acquisition environment allowed financial advisory revenues to rise to $616 million, up 10% from last year and 21% sequentially.

The company's asset management and securities services business continued to perform ably in the most recent period, growing revenues 13% from a year ago to $811 million. But the biggest change occurred in Goldman's trading and principal investments activity, which saw revenues more than triple to $1.4 billion after a disastrous 1998 in which financial markets in Russia and elsewhere fell apart. At their current run-rates, revenues from fixed income, currencies, and commodities (FICC) trading could reach $3.3 billion this year and equity trading revenues could hit $2 billion.

The strong results may not come as much of a surprise to U.S. investors who have grown accustomed to exploding corporate profits, a robust economy, and a surging stock market. But with so much attention placed on the performance of the U.S. economy and markets, it's dangerously easy to forget that Goldman Sachs and other investment houses are global businesses that can be significantly impacted by an often topsy-turvy world.

Last year's fall financial firestorm brought that risk into a sharper focus, and Goldman is now understandably conservative when projecting its future performance for investors. With the firm now a public company following its May initial public offering (IPO), Goldman's CFO showed some prudent restraint today by reportedly saying that the outlook for the rest of the year can best be summed up as "cautiously optimistic."

That's a smart tack to take, considering that the volatile trading business represented a relatively large 42% chunk of Q3 total net revenues. The company seems intent on bringing that figure down, although changes will not occur overnight. For example, combining the firm's asset management, brokerage, and private banking operations under one umbrella unit is part of an existing plan to triple revenues from those business lines by 2004. That means the trading business will remain king for some time to come.

In the meantime, observers are tapping their toes and waiting for the company to employ some of the $3.66 billion stashed away from the IPO to expand its more predictable asset management and investment banking businesses. Until that occurs, investing in Goldman Sachs -- like playing the investment banking game itself -- is not for the faint of heart or for those who are not in tune with the rapidly changing face of today's global financial marketplace.

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