Wall Street Is No Longer Paved With Goldman

APRIL 20, 2011   THE WALL STREET JOURNAL

By DAVID REILLY

For Goldman Sachs Group, the first quarter may be about as good as it gets in 2011.

That isn't much comfort for investors, even if the firm turned in a solid result. Revenue of nearly $12 billion and earnings per share of $1.56 both beat analyst expectations. The issue is that there isn't a clear catalyst investors can look to for a markedly better performance in coming months.

The first-quarter performance, for example, was juiced by $2.7 billion of revenue from the firm's investing and lending business—about $1.5 billion more than analysts expected. Those results, derived from equity and debt Goldman invests in for its own benefit, are unpredictable. Plus, there still isn't clarity about final rules over proprietary trading that could curtail that business.

A similar lack of regulatory clarity in other areas means Goldman for some time will have to continue holding levels of capital that keep a lid on returns. Goldman's return on tangible equity of 15.7% in the first quarter was at the bottom end of its 15%-to-20% target range.

Trading and sales revenue, while strong, will depend on market activity. And as Chief Financial Officer David Viniar noted on the firm's earnings call, market activity and trading opportunities aren't likely to return anytime soon to the heady levels seen in late 2009 and early 2010. Investment-banking revenue, meanwhile, remains somewhat lackluster.

Goldman's stock trades at about 1.3 times tangible book value. Barring an unforeseen surge in the economy or in trading activity, it is tough to see that multiple rising much further.

Write to David Reilly at david.reilly@wsj.com