Proving itself anew to be one of the hottest engines on Wall Street, Goldman Sachs Group (GS) on Mar. 14 reported quarterly gains that analysts called nothing short of "phenomenal." Compared with the opening quarter last year, Goldman hiked its net earnings 64%, to $2.48 billion, on a 61% gain in revenues, to $10.34 billion.
"They had a really impressive quarter, across the board," says Standard & Poor's analyst Robert Hansen. "Just about every segment was at or above record levels -- mergers and acquisitions, stocks and bonds, fixed-income, merchant banking. It was really just a phenomenal quarter."
"STRENGTH AND BALANCE." Little wonder the firm's stock closed up $8.70, at $149.42. Shares of rivals such as Merrill Lynch (MER), Bear Stearns (BCS), Lehman Bros. (LEH), and Morgan Stanley (MS) also jumped on Goldman's news. Even at their current lofty level, S&P is keeping its "strong buy" recommendation on Goldman shares, according to Hansen (like BusinessWeek and BusinessWeek Online, S&P is owned by The McGraw-Hill Companies.)
"We think Goldman is perhaps the firm best-positioned for an expanding economy," he says. "It is the most diversified among the major investment banks." Not only does the outfit arrange deals for clients, but it invests in them and in the markets its clients operate in. Chief Executive Officer Henry M. Paulson Jr., in a statement, hailed the outfit's "strength and balance."
The company isn't facing altogether smooth sailing, however. Rising interest rates could dampen markets and make credit more costly for Goldman's clients. Hansen warns of a potential "hiccup" in the bond market, though he argues that Goldman's operations in mergers and acquisitions and other areas could more than offset any downturn there.
CROWN JEWELS. The main engine for Goldman in the latest quarter was a unit that could most feel a pinch from rising rates: its trading and principal investments unit. The operation involves fixed-income and equities trading, along with investments that Goldman makes in companies around the world. It logged a 57% rise, to $6.9 billion, in the quarter, which ended Feb. 24.
Along with a turbocharged market for commodities trading -- which Goldman is especially strong in -- the results were goosed by a $405 million gain from its holdings in convertible preferred stock in Sumitomo Mitsui Financial Group, as well as $290 million from real estate and other investments.
Next in line was the outfit's asset-management unit. The segment, which Goldman started from scratch a few years ago even as some Wall Street rivals got out of the business, logged a 75% rise in revenues, to $1.98 billion. The unit manages money for pension funds and other institutional investors.
WIDE HORIZONS. Goldman's investment banking unit, which has taken part in most of the major corporate mergers in recent years, reported a big gain, too. Investment banking revenues rose 65%, to $1.47 billion. Analysts expect that investment banking will likely keep roaring, as Goldman's global clients -- many awash in cash and hungry for places to invest it -- will keep scouting for deals.
As globalization advances, too, the outfit stands to see further gains. Goldman executives have spent a lot of time developing tight ties to places such as China and India. They have invested in companies in such markets and, as they grow, they can only burnish the firm's results still more.
Hansen expects that the company's trading and M&A units will compensate for any shortcomings elsewhere. At least for the rest of the year, he says, Goldman will likely keep humming.