Hope glimmers, but doesn't glisten in dour season
MACQUARIE Group has produced an early taste of what the coming reporting season holds - some glimmers of hope but not enough, which points to a season tinged with disappointment.
This is a stock that over the past six months has undergone a seismic shift upwards, moving ahead by around 50 per cent. As such, the investment bank is priced for success. But what Tuesday's operational briefing delivered was tantalising but not enough to justify the recent share price run.
If the bullish sentiment in the equities markets continues, Macquarie will be a big winner. But these gains have yet to be locked in.
Chief executive Nicholas Moore forecast the earnings for the year to March 30 would increase by 10 per cent - a better outcome than most of the top 50 ASX listed companies that report their half-year earnings to December over the next weeks.
But it needs to be better. Investor disappointment was reflected yesterday in the 4 per cent fall in Macquarie's stock price as punters concluded that a 10 per cent profit improvement did not justify a 50 per cent share price gain. Nor does the profit outlook support a share price multiple in the range of between 12 to 16 times this year's earnings.
The forecast of a 10 per cent profit lift implies a full-year result of a little over $800 million, although market analysts were looking for something closer to $840 million.
A 10 per cent uplift is probably already in the bag and save some kind of markets disaster the full-year result would exceed this.
Moore reckons if improved market conditions persist an even stronger result is likely.
Investment banks such as Macquarie are highly leveraged to sharemarkets and with any signs of a rebound their stock prices will outperform most other sectors.
We have seen the same hockey stick-shaped share price graphs in the past six months in US investment bank stocks. Citigroup is up 57 per cent since August, Bank of America is up 58 per cent and Goldman Sachs 50 per cent in the same period. Quarterly earnings released by these US financial giants a few weeks ago show a return to solid earnings growth. Macquarie is simply catching the same wave.
Since the global financial crisis it has been a business looking for new focus and direction, surviving in part from one-off and opportunistic gains from its diverse operations.
Not surprisingly its annuity-based operations - funds management, banking and financial services - have been the big earners.
If the market continues to recover these will continue to improve but more cyclical divisions such as Macquarie Capital will produce the real gains that could justify the current earnings multiples.
Shedding cost will help as long as it is done with surgical precision, though investors won't be happy if the company cannot capitalise on the recovery.
Those who got into the stock early have made significant gains. They were prepared to risk that the early signs of improvements in equity markets represented more than just a breather in a bear market.
The author has shares in Macquarie.