Macquarie: Q3 Result 2014

Investors are waiting for the day that Macquarie Group’s profits get a huge boost from increased corporate and market activity, but the 4% fall in the company’s share price after announcing its third-quarter trading update shows it hasn’t come yet (Macquarie has a 31 March year end). Management merely reiterated its lacklustre full-year guidance of producing a higher profit than last year.

It’s been a consistent theme for several years now. Profits from the more stable annuity-style divisions (Macquarie Funds Group, Corporate and Asset Finance and Banking and Financial Services) are increasing slowly but steadily, while as a group the market-facing divisions (Macquarie Securities, Macquarie Capital and Fixed Income, Currencies and Commodities) are struggling.

It’s pleasing to see Macquarie handling the lion’s share of large IPOs in Australia, but future profit growth will be hitched to results in Asia and America. We highly recommend reading the presentation to gain a better understanding of its overseas divisions. While we detest companies that borrow heavily to expand overseas when it doesn’t make sense, Macquarie has been operating abroad for decades and is taking advantage of its global reach. Macquarie has raised almost US$700m from Asian investors for its European and US infrastructure funds, for example.

We’re increasing the prices in our recommendation guide by around 10% as we’re more comfortable that the company’s strategy is working, new regulations don’t pose any major threats and that there’s still room for profits to increase significantly if business and investor confidence returns. Management also continues to cut costs and the stock offers international diversification.

Still, we’re trimming the 5% weighting in the model Growth Portfolio due to the large increase in the company’s valuation over the past few years and we’ll likely reduce the position further as the stock price increases. The share price is down a touch since Macquarie: Interim result 2014 from 4 Nov 13 (Hold ­– $53.87) and we’re sticking with HOLD.

Note: The model Growth Portfolio owns shares in Macquarie Group.

Note: We’re selling 60 shares of Macquarie Group from the model Growth Portfolio at $53.60 per share, netting proceeds of $3,216.