Macquarie capitalises on volatility

The current fiscal year kicked off to a good start with first quarter results significantly ahead of the comparable period last year, bolstered by deal-making and trading profits. This bodes well for our earnings growth forecasts and should underpin a strong interim result.

Diverging views

Yet Macquarie is a company that always produces a difference of opinion which has often led to diverging views about how the company should be valued. These differences have fuelled some share price volatility in what are already volatile times.

The more optimistic believe Macquarie is a growth company with the potential to trade on a PER multiple in the twenties (it's currently 15.3) - it is a bank after all. On the other hand, detractors argue that a reliance on trading and deal-making type profits and a large exposure to Asian financial markets make it pretty risky. As a result, they consider that at these prices the stock is fully valued.

Management understands these differing perceptions and has gone out of its way to state that the volatile components of its earnings is only a small part of the group's trading activities and that adequate internal insurance policies are in place. The flip side to the risk associated with these activities is that the bank will continue to benefit from global sharemarket volatility. As they say, one man's defeat is another man's glory.

Extra risk, extra profit

There's no question that there is extra risk associated with such activities, which is why they're more profitable when they pay off. But if you look at Macquarie's track record it suggests that there's a better than even chance of continuing to grow earnings.

The makeup of Macquarie's revenue streams do carry a higher degree of risk than the more conservative big four banks but we think its track record and strong management team go a long way to quelling concerns. It would be wrong to assume that Macquarie is just another bank - clearly it isn't - but we think the concerns are overstated. If you're comfortable with the structure of its business and growth strategy, continue to ACCUMULATE.