A bargain hunter’s guide to Macquarie Group Ltd shares

Investment bank Macquarie Group Ltd (ASX: MQG) today confirmed that it expects its FY2016 profit to be higher than FY2015 even though the second half of FY2016 is expected to be marginally down on the first half.

The stock is down around 20% over the course of 2016 after global stock markets tanked and the US dollar weakened on various concerns about the outlook for the global economy as Macquarie remains a classically macro-facing business.

Banks like Macquarie and Commonwealth Bank of Australia (ASX: CBA) have also been under regulatory pressure to lift their capital ratios and the prospect of stricter capital adequacy rules is also making investors nervous.

Macquarie’s asset management business is its main earnings driver and it is naturally leveraged to the rise and fall of global share and capital markets with some $487 billion in total assets under managements as at the end of 2015.

Its Corporate and Asset Finance business was also the subject of media reports recently around the quality of its loan book, while its Banking and Financial Services business has delivered steady growth on the back of the domestic economy’s resilience to the mining downturn.

Macquarie also has several more cyclical business units that are more leveraged to trading volumes, equity capital market activities, merger and acquisition activity, IPOs, or other general investment banking work. However, these parts of what the bank the calls its capital-markets facing businesses collectively now represent only around a quarter of group earnings.

Macquarie’s fast-changing business mix is a consequence of the shocking fallout from the GFC, as the bank lives up to its reputation for adaptability by now generating far more annuity-style earnings.

Consequently the share price has lifted around 112% over the last four years with the group paying a strong dividend along the way.

Selling for $65 today the shares look good value to me and a much better bet than other domestically-focused banks many investors are attracted to like Australia and New Zealand Banking Group (ASX: ANZ) or Westpac Banking Corp (ASX: WBC).

The stock will seem especially good value if able to deliver consecutive earnings uplifts in FY17 and FY18 given it only trades on around 11x analysts’ estimates for full year earnings per share in FY2016.

Another financial services business I think also offers good value at current valuations is Magellan Financial Group Ltd (ASX: MFG). This internationally focused funds manager is still growing healthily and like Macquarie benefits from strong management and a genuine focus on long-term shareholder returns. Magellan shares sell for $22.02 today and with a healthy yield and reasonable valuation look a buy in my opinion.

New Potentially Life-Changing Share Picks Just Released

The Motley Fool's renowned dividend investing guru recently revealed his newest dividend buy recommendation and short list of 3 Best Dividend Buys Now. Which means if you're reading this message right now, you're not on the list to uncover their names before they potentially go gangbusters. Simply click here to learn more about these shares.

Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited and Magellan Financial. 

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.