JBL: A Perfect Storm

Into McCovey Cove

Goldman Sachs' (GS) last earnings report was very similar to Barry Bonds having a ball teed up for him. Goldman went deep.

Merrill Lynch (MER) and Bear Stearns (BSC) came out with good earnings, but Goldman's were great. Goldman Sachs blew away earnings estimates of $3.29 per share with $5.08 in the first quarter. Goldman already has earned 42% of profits that were forecast for the entire year.

Goldman is the world leader in mergers, acquisitions, public common stock offerings and IPOs. Goldman is best in class in trading commodities, fixed income and equities. Equity trading resulted in a 94% jump in revenue. Fixed income generated revenue of $3.74 billion, 42% higher than its previous record.

Return on equity was a record 38.8% in the first quarter, beating Morgan Stanley's record of 36.3% in the first quarter of 2000. Earnings were up more than 60% on revenue that was up also over 60%. This would be like a major league ballplayer having a 100-home run season with 40 stolen bases; dominant is an understatement.

Goldman has become so dominant that it creates a snowball effect. Goldman gets sweetheart deals, like first crack at business with many Asian companies like Sumitomo. CFO David Viniar told analysts that Goldman was seeing unprecedented trading and client activity in Japan and Asia, and that the level of deals pending is "significantly" higher than a year earlier. Rarely if ever have we seen fixed income, equities and mergers and acquisition at a high simultaneously. Goldman has encountered the perfect storm, and is profiting from it.

I could go on about the numbers, suffice it to say they were awesome. With a forward multiple of around 10 and a long-term growth rate of around 14%, this stock looks cheap. However, I believe the estimates are low. Merrill has a forward multiple of 12.8; if Goldman had the same P/E it would give the stock a 28% upside on multiple expansion alone.

Considering the perfect environment we are still in, the comments made about future deals by the CFO, and analysts being very wrong about the estimates this quarter, I believe this is a $190-$200 stock.

I would love to own this stock but am prohibited from doing so because I have a family member (my wife) who covers the stock as a sell-side analyst. For those (i.e., most readers) who don't have such restrictions, I highly recommend Goldman Sachs.

Remember, being poor is bad, staying that way is stupid.

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