Tuesday, September 18, 2007

Lehman's Earnings Give Me More Confidence In Goldman's

Lehman Brothers (LEH) release earnings this morning and their results, and especially the configuration of them bolstered my confidence and expectations for Goldman's (GS)on Thursday.

First the details. Lehman beat expectation by seven cents a share coming in at $1.54 vs the $1.47 estimates. Fixed income took the expected write-downs (revenues were off 47%) due to the current mortgage market "instability" but several other areas bolstered the firm and they are the very reasons I was so optimistic yesterday about Goldman.

Strong investment banking and retail brokerage fees pushed revenue up 3.1 percent to $4.31 billion and offset the $700 million hit from "substantial valuation reductions" in mortgage-backed bonds and other investments. In addition, the firm now gets 53% of it revenues from overseas operation, further insulating it from US housing.

The configuration of these results were the very ones I gave yesterday for my opinion that the current estimates for Goldman were too low, trading and overseas. There does seem to be an inability or refusal to see many of our international firms for what they are, international. Companies are seeing the prices of their shares decimated due to the US housing situation and in many cases, the effects of the housing market are not a significant determinant of earnings for them. When more than 1/2 of your revenues come from overseas, the conversation regarding earnings ought to be what is happening there, not in Peoria. This is also is true for the S&P that now gets over 50% of it's earning from overseas.

Why is this important? Even though we may (that is a big may but for arguments sake let's assume) be slowing down it the US, overseas is still booming. That means that 51% of earnings will be increasing and offsetting any potential decrease here. It is also important to note that this 51% is increasing so the international economy will begin to take on more importance. This is the reason the last few quarters estimates have been below reality. Folks are not quantifying international operations properly, or giving them enough weight..

This is ok though, it gives us more time to accumulate under-priced shares..

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