Goldman Should Handily Beat

Analyst expectations for the investment bank's second quarter are way too low.
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This post first appeared on Street Insight on June 12 at 8:43 p.m. EDT

The consensus estimate on

Goldman Sachs'

(GS) - Get Report

second-quarter performance is way too low.

On Thursday morning, the New York-based investment bank is scheduled to report second-quarter results for the period ended May 31. Analysts expect Goldman to earn $4.79 a share, with estimates ranging from a low of $4.20 to a high of $5.31.

But I believe this consensus estimate is very pessimistic. Goldman earned $4.78 in the year-ago quarter after accounting for SFAS 123-R expenses, and while that was a record quarter for principal investments at the bank, it also recorded a $61 negative mark-to-market on its Sumitomo Mitsui Financial position. This year, I expect a strong quarter in the principal investment business, but without a writedown of that magnitude.

In addition, Goldman increased assets under management by only 4% in the second quarter of 2006. I expect a much greater increase this year and one that is solely attributable to market appreciation.

While I do not expect investment banking, trading and principal investment to grow at the same rate in 2007 as it did in 2006 (when investment banking revenue rose 87%, and revenue from trading and principal investment more than doubled), overall I am looking for revenue growth in the 20% to 30% range as businesses in all geographic locations, especially in China, are cranking out spectacular revenue growth.

Furthermore, compensation was 50.4% of revenue in the second quarter of 2006, and that ratio has been declining industrywide for the past few quarters.

The consensus call is for Goldman Sachs to basically report a flat year-over-year quarter. But I believe it will earn between $5.50 and $6 a share, printing a number that will once again make investors look twice when it hits the tape, and prove that Goldman is the investment bank to the world.

At the time of publication, Rothbort was long Goldman Sachs, although positions can change at any time. Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities. Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University. For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.