Here’s my take on each of the financial companies earnings:
Goldman Sachs
It was a great quarter for Goldman Sachs. The investment bank had huge gains from its trading operations and bond offering business. I know that everyone is saying buy Goldman right here and now but I wouldn’t buy the stock at its current levels. The stock is trading at $150 and I would like to know more about the investment bank’s business model will be going forward. Goldman appears to be taking great risks again. Will Goldman’s trading operations be as profitable quarter after quarter?
JPMorgan Chase
JPMorgan Chase had a mixed earnings season. The banking giant saw its margins, trading and deposits go down. JPMorgan increased its loan loss reserves for the quarter as its loan portfolio saw increasing delinquencies. JP Morgan did have strong results from its commercial banking and asset management businesses. Analyst Dick Bove says “The reality is that this was a very bad quarter for JPMorgan Chase.” “Capital gains are the reason for the strong revenue and earnings performance and these are not sustainable.”
Bank of America
B of A is my favorite bank because of the upside potential but it is also the bank with the greatest downside risk. Bank of America’s earnings were boosted by its sale of China Construction Bank Corp and its strong deposit base. But the nation’s largest bank is still facing rising charge offs from its commercial, residential and credit card loans. CEO Ken Lewis stated that “Profitability in the second half of the year will be much tougher than the first half.” He attributed much of the bank’s success to capital gains.
Citigroup
I think that Citigroup still faces the same problems that have plagued the company for years. Citi does not have core businesses that make money. If you factor out the sale of Smith Barney to Morgan Stanley, Citi would have lost 2.4 billion in the second quarter. While JPMorgan Chase, Goldman Sachs and Bank of America were all able to generate substantial gains from trading operations, Citi was unable to do the same. The promising news for Citi is that CEO Vikram Pandit stated that troubled asset write downs “may be largely behind us.” This may be true but I still wouldn’t buy Citi even at $2 per share.
Short Term Outlook for 2009
The banking giants were able to post decent results for the second quarter but many of these gains were attributable to capital gains. It is unlikely that these one time gains will be duplicated in coming quarters. Loan losses will continue to grow as unemployment and income levels continue to drop.
Long Term Outlook
When unemployment moderates and the economy rebounds, the earnings power of these mega banks will be realized.
Finance
Bank of America, Citigroup, financials, Goldman Sachs, JPMorgan Chase
Today was a weird day in the market. The Dow opened positive, turned negative and then soared almost 200 points to end the day. The market was fueled by upgrades by analysts to financial stocks Goldman Sachs, Bank of America and JP Morgan. The interesting part is that these stocks have seen extreme run ups from their March lows. Wasn’t the time to upgrade Goldman Sachs to a buy when it was trading below $100? Or Bank of America when it was trading in the single digits? Analysts are often late to the party and miss big moves in individual stocks. They will rate a stock a “buy” after it has had a huge move to the upside. Or rate a stock a “sell” after the stock has dropped precipitously. It appears that investors are once again chasing stocks based on momentum plays. I find it interesting that as retail investors are buying, insiders are selling shares. I believe that these companies are good long term buys but i would load up on shares at cheaper levels.
Investing
Bank of America, Goldman Sachs, JPMorgan Chase
Warren Buffett appears to have failed in his attempt to buy Constellation Energy Group (CEG) for 4.7 billion dollars. MidAmerican Energy, Buffett’s company, agreed to purchase CEG for $26.50 a share in September. Constellation Energy terminated this agreement yesterday and accepted an offer from Electricite De Franc(EDF) for 4.9 billion dollars. EDF will purchase 50% of Constellation Energy’s nuclear power holdings and allow CEG to remain an independent company.
I took particular interest in this transaction because I owned stock in Constellation Energy and they are my hometown utility company. You would think that Buffett would be upset about being outbid for Constellation Energy. Think again. Buffett will walk away from his attempted acquisition of Constellation Energy with a 300% return on his investment.
Buffett will receive 418 million dollars in cash, 175 million in termination fees, 460 million in CEG stock and he gets his 1 billion dollar investment back. He will also earn an additional 140 million in interest over the next year while awaiting repayment of his investment. Buffett stands to make over 1 billion dollars on his original investment in less than four months. That is a return of 300 percent on an annual basis.
The brilliance of Warren Buffett is his ability to win in just about every investment that he makes. He buys distressed companies that are selling well below their true value. Buffett has a unique ability to see opportunity where others see calamity. This explains Buffett’s investment of 5 billion dollars in preferred stock and 5 billion dollar in warrants exercisable at $115 in Goldman Sachs. And Buffett’s 3 billion dollar preferred stock investment in General Electric with 3 billion in warrants exercisable at $22.25. Buffett invested in GE and Goldman at a time when they were in desperate need of capital.
Buffett was derided in October for his declaration that he was investing in US companies when others were pulling out. He has been putting money to work while others have fled for the safety of U.S. Treasuries. Time will tell if Buffett’s thesis is correct. Warren Buffett’s recent investment purchases may look risky right now but as history shows you shouldn’t bet against him.
Finance
Buffett, Constellation Energy, EDF, GE, Goldman Sachs, merger, Mid American
Goldman Sachs reported its first quarterly loss of $4.97 per share today. The loss was actually not as bad as the $5 loss that some analysts expected. The stock is down almost 70% for the year and is currently trading at $70. Goldman’s earnings per share for the year was $4.47 per share vs. $24.73 EPS last year. This means the stock is trading at a 15 multiple. If the company can grow its earnings to even one half of prior years earnings; then the stock could be a bargain. The difficult part is predicting earnings in the future as the company is converting to a bank holding company.
Finance
Goldman Sachs, quarterly loss
I will be keeping an eye on earnings announcements from Goldman Sachs and Morgan Stanley this week. It should give insight into just how bad things are for financial companies. Goldman currently trades at around $68 and Morgan Stanley at $14. Goldman is expected to report its first quarterly loss in 70 years. Analysts think that losses may be high as $5 a share. If earnings are worse than expected there will be a major sell off of financial stocks which may represent a buying opportunity.
Finance
earnings, Goldman Sachs, Morgan Stanley
