Goldman Sachs Group (NYSE: GS) is scheduled to report earnings at 8:30 a.m. Forbes reports that analysts expect it to make EPS of $6.61 for the quarter and $24.36 for the year. Its competitors are not expected to do as well.
How does Goldman do it? Joe Kernen of CNBC's Squawk Box asked me that this morning -- click here for the video. My answer was that, as I discussed in my book Value Leadership, Goldman is a firm of brilliant team players while many of its competitors employ a star system. This matters because Goldman encourages debate about critical decisions rather than imposing a decision from above.
This is how Goldman's proprietary trading desk was able to persuade its top managers, including its CEO, CFO and COO, that Goldman should short the ABX last year. According to the Wall Street Journal, by the time the rest of the market began to bet heavily on a decline in subprime mortgage-backed securities, Goldman had amassed a huge short position which enabled it to make $4 billion -- handily offsetting its $1.5 billion to $2 billion worth of losses in its own $10 billion Collateralized Debt Obligation (CDO) portfolio.
So what will Goldman's stock do this morning? It depends on whether it beats earnings estimates and if so, by how much. Last year, Goldman beat estimates by 13.4% in the fourth quarter and I think it needs to do that this morning if it's to see a pop in its stock price.
Here are three scenarios for how Goldman stock will move depending on its fourth quarter EPS report:
- $6.61 -> stock falls $20 a share
- $7.50 -> stock moves up or down $5 a share
- $8.60 -> stock rises $20 a share
I did not get to this discussion this morning on CNBC, but we'll soon see whether my analysis proves to be right or wrong. Given Goldman's track record of beating estimates and the amount of publicity it's gotten for its market-beating short bet on ABX, I think investors' expectations are high.
Update: Goldman reported EPS of $7.01 according to Reuters. In pre-market, Goldman stock is trading up $1.50 which suggests that it exceeded expectations by enough not to tank -- but not enough to spur a buying panic. Exceeding expectations by 6.1% was not as good as last year's 13.4%, yet Goldman still looks to be 2007's league leader.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs.
Before the bell: Stocks ready for a lower open after reaching 13-month highs
Ray of light: U.S. temp worker hiring increased by 34k in October
Goldman Sachs CEO Lloyd Blankfein pulls a Jeff Skilling in an interview
