Macquarie’s first-half earnings of $361 million were below market expectations. However, JPMorgan notes that as the investment bank continues to focus its offering in chosen products and markets, a successful cost (staff and non-staff) cutting program has been enough to offset revenue weakness and keep the bank's 2013 earnings forecasts intact at around $840 million.
Although the cost tailwind is likely ending this year, JPMorgan believes Macquarie has demonstrated sufficient flexibility in absorbing a tough revenue outlook, which should help it to avoid further material downside risk to current earnings forecasts. JPMorgan upgraded Macquarie to neutral from underweight and raised its target price by 14 per cent to $30.85.
Citigroup has also raised its target price on the investment bank, upping it by 7 per cent to $30.50 but leaving its recommendation unchanged at neutral. Citigroup said that it had increased its 2013 NPAT forecast by around 6 per cent following a slightly better outlook for the Macquarie funds unit, more expense savings in the second half and the ongoing and larger share buybacks.
Citi also said that while return on equity improvements may not be material in the next two years, the buyback should provide support to the share price.
The above chart paints an interesting picture. As you can see, despite the relatively neutral stance from brokers towards the stock it has actually managed to significantly outperform the big four banks over the last 12 months. In fact, it’s beaten its closest rival, ANZ, by nearly 6 per cent.
So it’s crucial to know how the big brokers are positioned and what they think of a stock, especially in a market that represents approximately 1 per cent of world equity markets and is so susceptible to institutional fund flows moving the market.
However, just because brokers don’t like a stock doesn’t mean it’s not going up and can’t be profitable.