Will Goldman Buck Credit Crunch Trend?
Goldman Sachs Group is slated to report its fiscal fourth-quarter results Tuesday before the opening bell. Following is a summary of key developments and analyst commentary related to the period.
Overview: Goldman Sachs has navigated this year's credit squeeze better than other investment banks.
With mortgage credit quality decaying and demand draining for risky investments, a host of investment banking mainstays from junk bonds to corporate takeovers have slowed or in some cases shut down.
The fallout from this upheaval has hurt some banks worse than others. Bear Stearns expects to book credit costs of $1.2 billion for the fourth quarter. Two hedge funds managed by the bank have gone bankrupt, and the company's stock is down more than 40 percent this year.
By contrast, Goldman Sachs has won plaudits for weathering the crisis so well. Shares of the other three major investment banks that report quarterly results this month -- Morgan Stanley , Bear Stearns and Lehman Brothers Holdings -- are down more than 20 percent this year. Goldman Sachs stock is up in 2007.
Goldman remains "short" mortgages, meaning positioned to profit when mortgages perform badly.
By the Numbers: Analysts polled by Thomson Financial expect Goldman Sachs to report profit of $6.61 per share on revenue of $10.16 billion for the quarter ended Nov. 30.
Analyst Take: Wachovia Capital Markets analyst Douglas Sipkin wrote in a research report Wall Street's fiscal fourth quarter will not be pretty, with Bear Stearns and Morgan Stanley reporting losses.
He expects Goldman's quarter to be the strongest of the four banks reporting this month.
"Goldman Sachs was a clear winner in 2007," he said. "Goldman Sachs will likely report a record year while most of the competition has reported losses in the second half of 2007."
Goldman has differentiated itself by timing its bets on mortgages well and investing in Asia at the right time, Sipkin said.
Citi Investment Research analyst Prashant A. Bhatia said although Goldman has proved the most adept investment bank during the credit crisis, its success is no secret. The bank's stock trades at a big premium to other investment banks, so the expected outperformance for Goldman's fourth quarter is already priced into the stock.
Goldman's shares trade at 2.33 times the net value of the company's assets. Of the major Wall Street banks, the second-highest price-to-book ratio is roughly 1.6. One bank, Bear Stearns, trades at a discount to the net value of its assets.
Share Performance: Goldman's stock climbed 29 percent during the fourth quarter to close November at $226.64.