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Goldman and Johnson & Johnson: A Tale of Two Earnings

Two large and important companies, each leaders in their sectors, reported second-quarter earnings today. Taken together, they help us get a picture of where our recession-stuck economy is right now.

Goldman Sachs, long considered the lion of Wall Street's investment banks, said its second-quarter earnings zoomed up 33 percent compared with the same quarter of last year.

Meanwhile, Johnson & Johnson -- maker of products such as Q-Tips, Band-Aid and Johnson's baby powder as well as pharmaceuticals -- said its second-quarter profit was down 3.5 percent compared with last year, thanks to lower revenue. J&J did, however, easily beat Wall Street's expectations for earnings.

So what do those two earnings reports tell us?

First, Goldman is separating itself from the other big banks. It received a $5 billion vote of confidence from Warren Buffett last fall. Goldman returned to profitability in the first quarter. It has repaid its government bailout money.

Among its competitors, Bank of America and Citibank still have real problems, aside from the fact that their leaders remain under fire. J.P. Morgan Chase & Co. and Morgan Stanley, both of which are healthy enough to have repaid their bailout grants, are now Goldman's closest competitors.

Goldman's big second-quarter profit came from fees it makes from trading stocks for clients. There was plenty of volatility in stock prices in the second quarter, which is like catnip to traders, who make money on price swings. Also, Goldman said, the financial meltdown has made it one of only a few games left in town.

"There's less competition out there," chief financial officer David Viniar said.

(It's worth noting that Goldman said it has set aside $6.65 billion for salary, bonuses and benefits in the second quarter, 1.5 times as much as a year ago.)

As for J&J, its not-as-bad-as-expected earnings came largely from cost-cutting. And you can cut costs for only so many quarters.

The drop in profits may have come from the "trade-down" factor, which we've discussed here before and which has benefited companies such as McDonald's and Wal-Mart during this recession, now in its 19th month.

For McDonald's, trade-down is good. For J&J, it's bad. It means that thrifty consumers are buying cheaper, house-brand bandages and cotton-tipped swabs instead of Band-Aids and Q-Tips.

In general, companies that make products you eat, smoke, drink or clean with are called "defensive stocks," meaning they're good to hold during a recession because people can't give up those necessary products.

However, if you make premium products that you eat, smoke, drink or clean with, you can get hurt in a recession. Any old baby powder will do; it doesn't have to be Johnson's.

-- Frank Ahrens
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By Frank Ahrens  |  July 14, 2009; 11:51 AM ET
Categories:  The Ticker  | Tags: Goldman Sachs, Johnson & Johnson, McDonald's, Wal-Mart  
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