What You Need to Know About Goldman Sachs

Chris Hondros/Getty Images

Chris Hondros/Getty Images

Goldman Sachs (NYSE:GS) is a pretty well-known financial company that has made countless investors loads of money over the years. It is one of the most successful banks in the history of the world. The company provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. The company is among the biggest players in the industry. Competing with the likes of Morgan Stanley (NYSE:MS) and JPMorgan (NYSE:JPM), Goldman has long been a strong performer.

Investment banks like Morgan Stanley and JPMorgan have ups and downs, but after Goldman’s strong performance, it is clear that investment banking is back. I think the stocks in this sector are far undervalued. I recently covered Goldman Sachs’ financial performance. I highly recommend reviewing that article prior to reading this piece. In this article, I want to dig a lot deeper into the numbers and examine its performance of each segment of the company to potentially identify any weaknesses in my buy recommendation.

Recall that Goldman Sachs operates through four segments: Investment Banking, Institutional Client Services, Investing and Lending, and Investment Management. I will address the performance of each segment as they contributed to the overall earnings blowout that the company reported.

Let us start with Investment Banking. In this segment, net revenues were $1.78 billion for the quarter, 15 percent higher than the second-quarter of 2013. However, this was flat quarter-over-quarter compared to the first-quarter. Within this segment there are several bureaus. Net revenues in the financial advisory bureau were $506 million, slightly higher compared with the second-quarter of 2013. Net revenues in the underwriting bureau were $1.28 billion, 20 percent higher than the second-quarter of 2013, primarily due to significantly higher net revenues in equity underwriting, reflecting an increase in industry-wide activity. Net revenues in debt underwriting were slightly higher compared with last year.

Turning to Institutional Client Services, net revenues were $3.83 billion for the second-quarter of 2014, 11 percent lower than the second-quarter of 2013, and 14 percent lower than the first-quarter of 2014. As I suspected, there had to be weakness somewhere in the portfolio. Let’s dig deeper. Net revenues in fixed income, currency, and commodities client execution were $2.22 billion, 10 percent lower than the second-quarter of 2013, due to significantly lower net revenues in currencies and, to a lesser extent, commodities. This bureau continued to operate in a challenging environment as market volatility and levels of activity generally remained low. Net revenues in the equities bureay were $1.61 billion, 13 percent lower than the second-quarter of 2013. A realized decrease in commissions and fees primarily reflected generally lower volumes, particularly in the United States and Asia. Securities services net revenues were essentially unchanged compared with the second quarter of 2013.

How about some real good news to follow that bad news? Well, net revenues in the Investing & Lending segment were $2.07 billion for the second-quarter of 2014, 46 percent higher than the second-quarter of 2013, and 36 percent higher than the first-quarter of 2014. Results for the second-quarter of 2014 included net gains of $1.25 billion from investments in equities, primarily in private equities, driven by company-specific events and strong corporate performance. In addition, Investing & Lending net revenues included net gains and net interest income of $604 million from debt securities and loans, and other net revenues of $215 million related to the firms consolidated investments.

The final segment to report on is the Investment Management segment. Net revenues here were $1.44 billion for the second-quarter of 2014, 8 percent higher than the second-quarter of 2013, and 8 percent lower than the first-quarter of 2014. The increase in net revenues compared with the second-quarter of 2013 was due to higher management and other fees, reflecting higher average assets under supervision. During the quarter, total assets under supervision increased $59 billion to $1.14 trillion.

So what is the take home message? Goldman Sachs had a fantastic quarter, but few analysts will discuss the building blocks. I felt it prudent to go more in-depth. As you can see, it was not all outperformance as the Institutional Client Services segment was a huge disappointment. Of course, these decreases in performance were more than offset by the other three segments. Going forward Goldman is still a great buy. In order for Institutional Client services to pick up, we need more volume in the stock market, primarily. When this occurs, this segment should outperform.

Disclosure: Christopher F. Davis holds no position in Goldman Sachs and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $200 price target.

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