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By Jason Simpkins
Just one day after the U.S. Federal Reserve orchestrated JPMorgan Chase & Co.’s (JPM) high profile buyout of The Bear Stearns Companies Inc. (BSC), both Goldman Sachs Group Inc. (GS) and Lehman Brothers Holdings Inc. (LEH) beat analysts’ earnings expectations yesterday (Tuesday), restoring some of the investor confidence lost during last weekend’s troubling episode.
Goldman Sachs said first quarter net income fell to $1.51 billion, $3.23 a share, from $3.2 billion, $6.67 a share, a year ago. The 53% drop in profit was the largest in nine years for the world’s biggest securities firm, but still beat analysts’ expectations, which were dampened by the subprime mortgage meltdown and severe erosion of investor confidence.
Profit was weighed down $1 billion in high yield loans, with another $1 billion loss on mortgage loans and related securities and a $135 million drop in the value of Goldman Sachs’ stake in the Industrial & Commercial Bank of China.
One bright spot in Goldman’s earnings release was the 38% increase in revenue from the company’s securities services division, which brought in $722 million.
The collapse of asset-backed securities and a record level of credit defaults have cost banks and brokerage firms an estimated $200 billion in write-downs. But Goldman has managed to shield itself from the brunt of the impact, and faces the least amount of risk at this point.
“People have a tremendous amount of confidence in [Goldman Sachs] and that’s what it comes down to these days,” Ralph Cole of Ferguson Wellman Capital Management, told Bloomberg.
While the collapse of Bear Stearns resulted in a large scale sell-off in the financial sector, many analysts think Bear’s absence will provide Goldman with a greater market share.
After Goldman’s earning release, Wachovia Corp. (WB) raised its rating of the firm’s stock from ‘market perform’ to ‘outperform.’
“Goldman Sachs will benefit from a flight to quality as investors look to trade with parties they deem more creditworthy,” Wachovia analyst Douglas Sipkin said in a note to clients. “We also believe huge opportunities exist in the prime brokerage business.”
Wachovia set its share-price estimate for Goldman at $180 to $185. Shares of Goldman Sachs closed the day 16% higher at $179.59.
‘Lehman Is Not Bear’
Lehman Brothers also demonstrated its resilience by beating analysts’ estimates yesterday. Lehman reported first quarter net income of $489 million, a 57% drop from $1.15 billion a year ago.
Lehman was forced to take a $1.8 billion write-down from mortgage market volatility. However, equities revenue climbed 34% to $330 million, and investment management revenue soared 39% to $968 million.
Lehman has hit a few stumbling blocks during the credit crisis. In the past seven months Chief Executive Officerannounced the close of its mortgage units, resulting in 5,300 job cuts. Given Lehman’s setbacks, nervous investors bolted from the company afraid that as the fourth largest U.S. investment firm, it would be the next investment firm to fold. Shares tumbled 19% to close at $31.75 apiece Monday after sinking as low as $20.25 earlier in the day.
Investors stampeded back into Lehman yesterday after the report’s release, driving the stock up 43% to close at $41.51.
“Lehman is not Bear,” Mike Mayo, an analyst with Deutsche Bank AG (DB), said in a report yesterday. “It has more liquidity. It has support among major counterparties. Its franchise is more diversified.”
News and Related Story Links:
- Financial Times:Lehman and Goldman raise hopes
- Bloomberg:U.S. Stocks Gain on Goldman, Lehman Earnings, Fed Speculation
- Bloomberg:Goldman Share Rating Raised by Wachovia on Bear Stearns Sale
- Money Morning:With Bear Stearns Deal and New Game Plan, Fed Raises New Fears About Credit Crisis