Strong Earnings at Goldman

This morning, Goldman Sachs (GS) reported earnings that beat consensus on stronger revenue and lower expenses. The positive call-out was the strength in investment banking, whose top line was the highest seen since 2007. We expect the investment-banking segment to continue to firm this year as the U.S. economy improves and leads to better customer activity, including in mergers and acquisitions. We like the leverage that Goldman has to this theme.

Following the earnings beat, Goldman shares initially soared $4 in the premarket, but the stock has given back some of those gains. We think this is because investors wanted to hear word of new capital deployment -- that is, a new share-buyback program and/or plans about a dividend increase -- and there was no announcement on this front. We do expect a new buyback authorization in the next several months.

Importantly, despite a very challenging macroeconomic environment, the company put up 11% return on equity -- the highest of its peers and well above the average of 8%. We don't expect the ROE to return to the pre-financial-crisis levels of 30%-plus, but we do see a gradual improvement to the mid-teens. Average share count is down 5% from the prior year, and we expect further shrinkage of the float over time. Tangible book value rose 1% sequentially to $145.04 per share, and the stock remains cheap on this basis.

Earnings for the quarter totaled $4.02 per share, better than the $3.44 consensus. Core net revenue came to $9.33 billion -- ahead of the $8.5 billion consensus -- driven by higher top-line results in investment banking, investment management and investing and lending (I&L). The trading segment showed softer revenue. Investment-banking revenue rose 13% year over year, investment management grew 20% and I&L reached $1.5 billion (the latter is a new segment, so there are no year-over-year comparisons).

As for investment banking, the top line totaled $1.8 billion vs. the $1.5 billion consensus -- up 13% from the prior year and 4% from the prior quarter. These are impressive results, given the seasonality. They were driven by better debt capital markets, whose revenue rose 29% sequentially, though is still down 5% year over year, and equity capital markets, which fell 30% from the prior quarter but rose 12% from a year earlier. Advisory rose 41% year over year.

Total trading results were challenged, something that has been case for the industry as a whole. However, the performance was better than feared, with revenue falling 15% year over year but rising 23% sequentially. The weakness was mainly on the equities side, which showed a 6% decline from the prior quarter. Revenue from the Fixed Income Clearing Corporation (FICC) rebounded nicely, rising 50% sequentially -- and the figure was up 68% if we adjust for debt value adjustment (DVA). FICC revenue fell 13% year over year, although this was better than peers: At Citigroup (C) this figure fell 18%, and at JPMorgan (JPM) it declined 21%. Bank of America (BAC) had a similar drop of 15% on an adjusted basis.

The compensation/net-revenue ratio was in line at 43% vs. 42.7% in the prior year. Non-compensation expense was down 8% from the prior year -- ahead of expectation -- with a 1% reduction in the workforce. Capital ratios were strong: Total capital totaled $244.7 billion, and a Tier 1 Common under Basel III came to 11.3%. Global Core excess liquidity came to $175 billion and averaged $181 billion for the first quarter. The company bought 10.3 million shares at an average price of $165.58 apiece, and has a 46.9 million authorization remaining. Again, in the next few months we expect the company to announce a new buyback program to the tune of $5 billion to $6 billion.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long GS, BAC and JPM.