Goldman's Big Quarter Leaves Street Cold

The investment bank reported results that topped analyst forecasts Thursday, but the shares declined anyway

The largest U.S. investment bank, Goldman Sachs (GS), was overshadowed by one of its smaller rivals when it reported earnings on Thursday.

Goldman's second quarter earnings of $4.93 per share were 7 cents above analysts' expectations. Investment banking broke records and equity trading also did well, giving the firm total revenues of $10.2 billion, down 1% from a year ago. As expected, revenues fell in the fixed income business, where the weak housing sector and troubles with sub-prime mortgages hurt the mortgage market.

Those results were consistent with what many analysts expected. So why were Goldman shares were trading down about 3% midday on Thursday?

One reason is that Lehman Brothers (LEH), Goldman's smaller competitor, faced many of the same issues but shocked Wall Street with record profits earlier in the week. Its earnings of $2.21 per share, or $1.3 billion, were 33 cents higher than analysts' estimates. That's despite the fact that U.S. revenues were flat.

Goldman is seen as "the industry leader," says Matthew Albrecht, an analyst at Standard & Poor's Equity Research. So, Lehman Brothers' results raised expectations that Thursday's earnings didn't meet.

Still, Albrecht, who has a "strong buy" rating on the stock, says the fundamentals for Goldman's business remain very strong. Investment banking and equities trading, both Goldman specialties, are doing very well.

Goldman is also making big investments overseas, especially Asia, where it sees huge growth potential. Revenues from outside the U.S. made up 52% of Goldman's total, up slightly from last quarter. A key focus is China, chief financial officer David Viniar told analysts Thursday. "We think that the opportunities there are still every bit as good as they have ever been," he said.

Lehman Brothers said much of its growth was coming from overseas as well.

One difference between the two may be big losses Goldman took on two huge investments it has made firms in Japan and China. It lost $189 million on those investments in the second quarter.

These kind of one-time negative events are typical for big banks like Goldman. Huge deals or big gains and losses in one particular quarter can make earnings very hard to predict. "It's a very opaque business," S&P's Albrecht says, noting that despite its size, the $189 million loss doesn't reflect any change in the firm's long-term fundamentals.

(S&P, like BusinessWeek, is a division of the McGraw-Hill Companies.)