Broker slaps $95.60 price target on Macquarie Group Ltd

Macquarie Group Ltd (ASX:MQG) shares could head higher in 2016.

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The Fairfax media is reporting that broker CLSA thinks investment bank Macquarie Group Ltd (ASX: MQG) is significantly undervalued at its current share price around $73.50.

In fact the research analysts at CLSA reportedly have a $95.60 share price target on Macquarie, which means it could deliver investors upside of around 25% if it hits CLSA's price target.

Recently, Macquarie Bank reported a record-breaking full year profit of $2.06 billion and delivered investors a full year dividend of $4 per share on $6.19 in earnings per share. That puts it on a payout ratio of around 66%, with a trailing yield of 5.4% on a modest 12x trailing earnings per share.

The bank is forecasting for the profit result for the year to March 31 2017 to be roughly in line with the prior year, although if the Australian dollar continues to weaken in the 12 months ahead Macquarie is likely to comfortably beat last year's result all else being even.

The US economy and equity markets have also performed strongly since Macquarie ruled off its books at the end of March 2016. If Macquarie were able to lift earnings per share by low-to-mid-single digits it would only need to expand its price-to-earnings multiple to a modest 14-15x to reach CLSA's $95.60 price target.

Another business with significant leverage to a weaker Australian dollar and strength in US equity markets is international equities manager Magellan Financial Group Ltd (ASX: MFG).

I expect Magellan will post record funds under management in the region of $42 billion for the end of May and like Macquarie it offers ASX investors the opportunity to buy a well managed, high-quality business with leverage to strength in US equity markets over the 12 months ahead. On current valuations I would marginally prefer Macquarie Bank, although still expect both stocks will offer investors solid long-term returns.

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

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