Why Macquarie Group Limited is a buy

Macquarie Group Limited’s (ASX: MQG) operational update for the third quarter stated that market conditions continued to show signs of improvement, however capital market activity remains subdued for some of the group’s market facing businesses.

In the outlook statement, the company said that while market volatility makes forecasting difficult, FY14 net profit is expected to be higher than FY13. The bank had a solid year in 2013, experiencing a 14.4% rise in net profit to $872 million.

Macquarie is progressively replacing the significant revenue streams previously sourced from its highly profitable satellite infrastructure fund business model. The ability of the company to adapt to volatile market conditions and reduce its variable costs, coupled with its strong balance sheet and skillful management team has helped offset difficult market conditions since the global financial crises.

The group’s wealth management business and finance leasing business have performed well during recent times and have offset the poor performance of the segments impacted by poor economic conditions.

Macquarie is now in a strong position to leverage a recovery in global market conditions and increased mergers and acquisitions activity. The group’s market facing businesses — Macquarie Capital and Macquarie Securities — and fixed income currencies and commodities should see improving market conditions as evidenced by strong half-year FY14 results. Favourable market conditions should prevail going forward due to stronger global stock markets, increased capital market activity, an improving U.S. economy and increased IPO market.

While the market facing businesses continue to gradually recover, strong contributions from the three annuity-style businesses — funds management, asset financing, and banking and financial services — should prevent any downside in earnings.

While the big four Australian retail banks — in particular, Westpac (ASX: WBC) and Commonwealth Bank  (ASX: CBA) — appear to be expensive at their current share prices, Macquarie’s share price offers upside as global market conditions improve.

Foolish takeaway

The performance of Macquarie Group is highly leveraged to global market conditions. As global market conditions continue to improve, Macquarie should see significant earnings growth and consequently share price appreciation. The group’s solid performing annuity-style businesses provide reliable earnings and should prevent any downside to the current share price.

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Motley Fool contributor Bradley Murphy does not own shares in any company mentioned in this article.

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