Goldman 2nd-Qtr Net More Than Doubles, Led by Trading, M&A
June 13 (Bloomberg) -- Goldman Sachs Group Inc., the world's biggest securities firm by market value, said fiscal second- quarter profit more than doubled on higher revenue from trading securities and arranging mergers.
Net income climbed to $2.31 billion, or $4.78 a share, in the quarter ended May 26 from $865 million, or $1.71, a year earlier, Goldman said today in a statement. Earnings got a boost from the sale of a power plant to General Electric Co. Profit exceeded the $4.28-a-share mean estimate in a Thomson Financial survey of 19 analysts.
While Goldman's profits were its second-best ever, shares of the New York-based firm fell 3.3 percent yesterday on concern that tumbling stocks and rising interest rates will limit profit growth. Lloyd Blankfein, Goldman's former trading chief, is taking over as chairman and chief executive officer from Henry Paulson, who was nominated as next U.S. Treasury Secretary on May 30 after leading the firm to record profits the past two years.
``There's a low level of confidence about the sustainability of trading profits,'' said Les Satlow, who helps oversee $370 million at Salem, Massachusetts-based Cabot Money Management, which owns Goldman shares. ``A lot of the areas where Goldman has been very successfully trading have been areas of the greatest pullback,'' he said before figures were released.
Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, yesterday reported a 47 percent increase in second-quarter profit. The company's stock fell the most in almost four years after Lehman officials said a prolonged market decline may slow the pace of equity underwriting.
The 12-member Amex Securities Broker/Dealer Index declined 3.2 percent yesterday, the most since September 2004.
Power Plant
``Over the last couple of quarters, everything has been working,'' said Michael Hecht, an analyst at Banc of America Securities in New York, who has a ``neutral'' rating on Goldman. ``As markets start to soften, everything could start to fall off.''
In the first quarter, Goldman earned $2.48 billion, the most in the history of the securities industry.
The firm's biggest unit -- fixed-income, currencies and commodities, or FICC -- generated $4.32 billion of revenue, up from $1.52 billion a year earlier. That included a gain from the sale of a 940-megawatt power plant in Linden, New Jersey, to a unit of General Electric for an undisclosed sum. Merrill Lynch & Co. analyst Guy Moszkowski estimated the sale would produce a $700 million gain.
Commodity prices, including those of copper, gold and zinc, reversed course in May. The Reuters/Jefferies CRB Futures Price Index of 19 commodities fell 1.4 percent in May after rising more than 5 percent in the first four months of the year.
Trading Revenue
Revenue from equity trading increased to $2.35 billion from $1.11 billion a year earlier. After advancing in the first four months of the year, the Standard & Poor's 500 Index slid 3.1 percent in May, the U.K.'s FTSE 100 Index declined 5 percent, Japan's Nikkei 225 dropped 8.5 percent, and emerging markets in Russia, Brazil and India fell even more.
While prices are lower, the volatility in markets is rising, providing Goldman and its competitors more opportunities to make money from trading. The Chicago Board Options Exchange SPX Volatility Index rose to 21 yesterday from an average 12.7 in the three months ended May 31. Goldman typically relies on stock trading and commissions for almost 25 percent of its revenue.
Goldman was the top adviser on takeovers completed in the past fiscal quarter, closing 65 transactions valued at $204 billion, up from 63 deals worth $92.9 billion a year earlier, data compiled by Bloomberg show.
Stock Sales
The firm also managed the most share offerings during the three-month period, arranging $24.5 billion worth of stock sales compared with $8.4 billion a year earlier, according to Bloomberg data. In fixed income, Goldman managed $28 billion of dollar- denominated bond sales, up from $19 billion a year ago.
Goldman's profit fell short of expectations in two of the past five quarters, according to Bloomberg data. Analysts, thrown off by unpredictable trading revenue, underestimated first- quarter earnings per share by more than 50 percent.
Shares of Goldman are still up almost 14 percent this year after yesterday's slide, compared with the 3.4 percent gain of the Amex Securities Broker/Dealer Index.
Only Bear Stearns Cos. has risen more of the five biggest U.S. securities firms, up 14 percent. Shares of Merrill are up 1.3 percent; Morgan Stanley is up 2.6 percent; and Lehman is down 3.2 percent.
Paulson, 60, was nominated May 30 by President George W. Bush to succeed John Snow as Treasury Secretary. His confirmation by the U.S. Senate probably will occur in the next two months.
Blankfein, a 24-year veteran of Goldman who has been president since 2003, was named on June 2 to succeed Paulson. Analysts including UBS AG's Glenn Schorr expect that Blankfein, 51, will name co-presidents. Among the leading candidates are Jon Winkelried, 46, co-head of investment banking; Gary Cohn, 45, co- head of equities as well as fixed-income, currencies and commodities trading; and J. Michael Evans, 48, a trading co-head leading Goldman Sachs Asia.
To contact the reporter on this story:
Christine Harper in New York at charper@bloomberg.net.
Last Updated: June 13, 2006 08:30 EDT
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