MARKETS SPECTATOR: Macquarie on top

Credit Suisse's James Ellis price target for Macquarie's stock is the highest among his peers. He may have to raise it.

This month Macquarie Group’s astonishing share price performance has continued. The stock has gained 17 per cent compared with the S&P/ASX 200 Index, which is up barely 1 per cent.

Credit Suisse’s James Ellis won’t be drawn on whether he will have to revise up his $48 price target for the stock – the highest rating of the stock among his peers – citing compliance obligations, but if his analysis is anything go by he may have to.

Ellis is a bull on Macquarie shares with an 'outperform' rating on the stock. In a 'risk on' environment where equity prices are increasing, Macquarie’s stock has been swept higher. At about 1.2 times book, Ellis reckons Macquarie is not expensive. It will be able, in coming months, to leverage off any improvement in M&A advisory, equity capital markets underwriting and equities trading. Moreover, the company’s cost to income ratio is sliding and it has ample capital, he says, to deploy it in areas where opportunities arise. Macquarie’s tax rate, about 43 per cent, is at an historic high. It may fall, further benefitting the company’s bottom line.

The Credit Suisse analyst says Macquarie’s historical legacy will also benefit it. Its roots as an English merchant bank which structured rather than financed transactions will be especially helpful as Basel III makes funding and capital expensive for the commercial/investment banking model, as exemplified by firms such as Citigroup or JPMorgan. Unlike its American or US counterparts, Macquarie faces substantially little regulatory, political or litigation problems. Its footprint as a globally second-tier Asia-Pacific focused bank may benefit it as it has little of the legacy issues associated with Europe or the US.

Ellis, not surprisingly, is one of Macquarie’s favourite analysts. He points out the firm has never made a loss in four decades. Its start, stop buyback – Macquarie bought back only about half of its $500 million stock repurchase plan – and the increase in the dividend payout ratio to as much as 80 per cent from 60 per cent is proof of management’s belief in the stock and future earnings, Ellis says.

As the global economy continues its patchy recovery, the value of Macquarie’s $5 billion book of equity investments will probably increase. In the second-half of this year Ellis says Macquarie’s much maligned securities unit has returned to profit, together with its investment bank that has returned to profit before it.

At 1334 AEST Macquarie’s shares had gained $1.20, or 2.7 per cent, to $45.75 against the benchmark S&P/ASX 200 Index. The stock has risen 72 per cent in the last 12 months compared with the 27 per cent rise in the S&P/ASX 200 Index.

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