Goldman Sachs (GS-NYSE) will report Tuesday on its earnings numbers for the quarter.  Estimates are for 3.5% revenue growth to $10.7 billion and EPS of $4.90, which compares to $5.09/share in the same quarter last year.  Now by all accounts, the first quarter results from last year were a blowout, as actual results came in 54% above the $3.29 estimates.

But on Tuesday we will see the beginning of a hard year for Goldman in terms of comparisons, as the financial sector as a whole is running on very high earnings figures.  Goldman’s earnings estimates for the current year are running 2-3% less than ’06 levels, compared to expectations for moderate earnings growth across the sector of about 6%.

The recently-tepid IPO & secondary markets may not bode well for Goldman’s investment banking business where they remain a massive player.  While Goldman has fairly diversified revenue streams from its increasingly global trading business, it’s the investment banking unit that can drive earnings.   

GS stock has certainly been a market superstar in the past year, up over 80% since March 2006.  But try as they might to fight it, the company is highly sensitive to the overall level of economic growth and liquidity within the markets.  If either of these two variables start to erode, a lot of earnings at Goldman will be at risk, and the 10x forward multiple on the stock won’t look quite as safe as before.

Most analysts know, however, that Goldman can manage to do a pretty good job of maintaining decent margins in a downturn.   A weakening IPO market can trickle-down to many levels for Goldman Sachs, particularly since is raised an estimated $24 billion in private equity over the past 18 months.  A slow IPO market will limit the "going private" transactions from having an exit other than selling to other buyers rather than to the public.

Jim Cramer has been a steady supporter of Goldman Sachs, and this was his #2 VALUE PICK FOR 2007 just two months ago.  On January 3 when he made the call, shares were at $200.38 and closed up as high as $220.94 in February.  The market slide has taken this back down just under $200.00 this week.  The short sellers decreased their 8.9 million shares in January to 7.02 million shares in February.  As of today, Goldman Sachs has an $82 Billion market cap.

As a reminder, Wall Street investors have become used to these names beating estimates followed by a sell-the-news mentality if the numbers weren’t a blowout or if they are hard to maintain.  Here is how we noted Goldman Sachs trading right after its last earnings report.  At around $200.00, one has to wonder if the company will try the stock-split feather in their hat to try to drive interest and stock prices.  We’ll keep an eye on the stock heading into earnings along with its peers Lehman Brothers (LEH) and Bear Stearns (BSC), who report on Thursday and Friday, respectively.

Written by Ryan Barnes,
edited by Jon Ogg
March 9, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

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