NEW YORK – Both Bear Stearns Cos. Inc. (BSC) and Goldman Sachs Group Inc. (GS) posted record revenues and record earnings for a record 2005 on Thursday. Yet Wall Street treated the two investment banks very differently.
Bear Stearns saw its stock climb sharply, mostly due to a settlement with the Securities and Exchange Commission and the New York Stock Exchange over mutual fund trading practices. The company will pay $250 million in fines and must hire consultants to help oversee its trading practices.
Given that regulators could have chosen far more expensive penalties, investors were pleased; an upbeat fourth quarter earnings report that soundly beat analysts' forecasts also helped. Bear Stearns shares surged $5.91, or 5.4 percent, to $116.41 in afternoon trading on the NYSE, surpassing the stock's previous 52-week high of $115.86.
"Because of that regulatory issue, Bear stock had been held down under a huge cloud of uncertainty all through six months of negotiations," said Brad Hintz, brokerage analyst at Sanford Bernstein. "Arguably, it's a painful fine, but the business survives intact, and that's the most important thing."
Goldman Sachs, meanwhile, continued to show why it's becoming Wall Street's new gold standard for investment banks: A 36 percent jump in fourth quarter earnings, double-digit growth in all its businesses, a record year and undeniable leadership in stock offerings, bond underwriting and merger-and-acquisition advisory services.
Yet Goldman's quarterly earnings merely met Wall Street's forecast of $3.35 per share — unusual for a company that regularly beats the average earnings estimate by a wide margin. And its full-year earnings, while a record, missed analysts' forecasts by a nickel despite record revenues. The problem is that expenses went up, too.
"Compensation expenses were much higher than I expected," Hintz said. "And it's accelerating. They're paying out more for each new dollar they make from the year before. It's kind of the price you pay for being they best. You have to pay more to keep your people."
Goldman Sachs shares were bid generally higher over the past six weeks in anticipation of the usual blockbuster quarter, and investors were quick to sell after Thursday's earnings report. Goldman shares fell $1.49, or 1.2 percent, to $128.14 on the NYSE. The stock has traded in a 52-week range of $94.75 to $134.99.
The two companies also had differing results in their areas of strength. Bear Stearns, noted for its fixed-income trading, saw its revenue rise 18 percent in that division despite a traditional fourth-quarter decline in such trading. Combined with strong institutional stock trading and clearing services, the company was able to present a very strong fourth quarter.
"Seeing what we've achieved in a very difficult environment, there's a lot of opportunity for us going into 2006," said Sam Molinaro, Bear's chief financial officer.
For the quarter ending Nov. 30, Bear Stearns had record net income of $407 million, or $2.90 per diluted share, up 15 percent from $352.6 million, or $2.61 per diluted share, in the year-ago quarter. Revenue rose 3 percent to $1.9 billion from $1.8 billion in the fourth quarter of 2004.
Analysts had forecast earnings in the most recent quarter of $2.63 per share on revenue of $1.798 billion.
That fourth-quarter boost helped Bear Stearns to its record year. For the full year, Goldman Sachs earned $5.61 billion, or $11.21 per share, compared with $4.55 billion, or $8.92 per share, in 2004. Revenue rose 21 percent to $24.78 billion from $20.55 billion last year.
Analysts expected full-year earnings of $11.26 per share on revenue of $24.39 billion.
Part of Bear Stearns' record year was due to keeping costs relatively level. The percentage of revenue that was spent on compensation — a key metric for people-centric Wall Street firms — was 47.9 percent for 2005, compared with 47.8 percent in 2004.
Goldman Sachs, however, saw its compensation ratio increase to 47.2 percent compared to 46.7 percent in 2004 — a sharp jump that was necessary to keep its workers in place, Hintz said. Compared to the increase in revenue, however, Goldman is paying more, per dollar, to earn additional revenue above 2004 levels.
At the same time, Goldman's strength in its investment banking unit, which is at or near the top in every industry metric, is being diluted by the way companies are handling their stock offerings. In the past, companies wishing to go public or to offer additional stock picked one underwriter and a handful of co-managers. Now, according to Goldman Sachs CFO David Viniar, companies are picking more chief underwriters and additional co-managers.
So even though Goldman saw its best investment banking revenues in four years, it's paying more to provide services that, ultimately, pay less.
"By whatever ranking you want to use, we continue to be one of the leaders in the business," Viniar said. "We're right there doing our fair share of business. There's just less fees going around."
Nonetheless, quarterly and full-year profits at Goldman remained strong, even if they still disappointed investors. For the fourth quarter ended Nov. 25, Goldman Sachs earned $1.62 billion, or $3.35 per share, compared with $1.19 billion, or $2.36 per share, in the year-ago quarter. Revenue surged 37 percent to $6.296 billion from $4.58 billion in the fourth quarter of 2004.
Analysts had forecast fourth-quarter earnings of $3.35 per share on revenue of $5.91 billion.
Higher costs, however, including an overall 19 percent increase in expenses, pressured Goldman's full-year results. For 2005, Goldman Sachs earned $5.61 billion, or $11.21 per share, compared with $4.55 billion, or $8.92 per share, in 2004. Revenue rose 21 percent to $24.78 billion from $20.55 billion last year.
Analysts expected full-year earnings of $11.26 per share on revenue of $24.39 billion.
Get all the stories you need-to-know from the most powerful name in news delivered first thing every morning to your inbox