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Goldman Beats the Street

Goldman Sachs (GS) reported robust second-quarter earnings Tuesday morning that beat Wall Street earnings estimates, but failed to spark a significant rally since much of the anticipated good news was already priced into the shares from the previous trading session.

On Monday, banking analyst Meredith Whitney upgraded Goldman’s shares to Buy (and publicized it in a morning interview on CNBC), setting off a rally that pushed the company’s shares $7.57, or 5.3%, higher during the trading session. Whitney said the company’s ability to survive the financial crisis largely intact positioned the firm as a dominant force in the “most unpredictable markets, including government, corporate and municipal debt.”

Investors weren’t disappointed when the company reported Tuesday morning. Goldman posted earnings of $4.93 a share, up from $4.58 a share a year ago. Wall Street analysts, on average, expected earnings of $3.48 a share.

Trading, fixed income and underwriting all had better-than-expected results for Goldman’s second quarter. Much of the firm’s underwriting revenue came from secondary share offerings by troubled banks and financial institutions that were required to raise additional capital by the federal government.

Goldman’s Chief Financial Officer David Viniar said on a Tuesday conference call that the firm was able to take advantage of some aspects of the recent market rally, but that the outlook remains uncertain, particularly when it comes to mergers and acquisitions.

“The operating environment for several of our businesses, including M&A advisory and Securities Services, remains challenging,” he said. “An uncertain macroeconomic outlook, coupled with low CEO confidence, has resulted in lower M&A activity.”

Calyon Securities analyst Mike Mayo said Tuesday that Goldman’s gains may not be sustainable, since so much of its underwriting was driven by the follow-on effects from government intervention.

“Thus, one question is the degree that equity trading will settle down if equity underwriting does not remain as strong, as expected,” he said.

Bottom line: Buy

As the investment house with the strongest standing on a still-reeling Wall Street, Goldman is a more-stable bet than the competition.

Health Net Loses Multibillion-Dollar Government Contract

Shares of insurer Health Net (HNT) fell 16% Tuesday morning, after the Woodland Hills, Calif.-based company lost part of a $17 billion contract to provide care to military families.

On Monday evening, the U.S. Department of Defense announced that it will pay tens of billions of dollars to insurers Aetna (AET), UnitedHealth Group (UNH) and TriWest Healthcare Alliance of Phoenix, Ariz., to provide managed care support to military families under its Tricare program.

Bumped from the program were Health Net and Humana (HUM) sending shares of both companies spiraling downward. (Humana’s shares were down 5.5% in midday trading Tuesday.) In 2008, the Tricare contract comprised 18.6% of Health Net’s total revenue.

Health Net said in a prepared statement that it may protest the decision, but has yet to take a definitive course of action.

“We anticipate that a debriefing will be conducted within the next couple weeks. We will consider the information provided at the debriefing, and within two weeks following, we will determine whether we will accept or challenge the award decision,” said Steven Tough, president of the insurer’s federal services division.

Oppenheimer & Co. analyst Carl McDonald said it’s tough to reverse the direction of any government contract decision, and didn’t believe there was much upside for Health Net or Humana.

“The stocks have little to gain from retaining the business, but a lot to lose if the contract goes to someone else,” he said in a Tuesday note. “It doesn’t happen very often, but every once in a while there is a major shake-up, and the TRICARE award certainly qualifies.”

Bottom Line: Hold

Investors reacting to a crisis can push a stock too far to the negative. Wait for the dust to settle a little before unloading this stock.

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