2 large cap financials that are tipped to deliver ~20% earnings growth

Forget the Big Banks if you are looking for fast profit growth and rising dividends. These two large cap financials are better bets, according to Credit Suisse.

The banks are under a cloud and would be lucky to deliver earnings growth that matches inflation-like rates, but don’t think the sector has gone ex-growth either!

There are at least two large cap financial stocks that are well placed to deliver earnings per share (EPS) growth at a just under 20% compound annual growth rate (CAGR) over the next two years, according to Credit Suisse.

Double-digit earnings expansion won’t be driven by organic growth – not at the big end of town. The mighty uplift in EPS for both stocks will come from smart acquisitions and the companies benefiting from industry consolidation.

The two stocks are wealth management group IOOF Holdings Limited (ASX: IFL) and fund manager Magellan Financial Group Ltd (ASX: MFG). Both stocks sit at the top of Credit Suisse’s buy list for large cap financial stocks.

“Our top pick is IFL, given exposure to the structural growth in the independent advice market through its advice and platform offering, and the valuation support (12x FY20E EPS) created through the ANZ Wealth acquisition, which also offers upside through synergy beats and an increased penetration of the ANZ customer base,” said Credit Suisse.

IOOF has agreed to acquire the wealth business of Australia and New Zealand Banking Group (ASX: ANZ) and the transaction should be completed in October this year (assuming everything goes smoothly).

The stock is forecast to produce an 18% CAGR increase in EPS out to FY20 and Credit Suisse has an “outperform” recommendation on IOOF with a price target of $12.30 a share.

Magellan is in number two spot thanks to the strong growth in its funds under management (FUM) that is underpinned by the launch of the Magellan Global Trust, increasing capital flows into the business from institutional investors and accretive acquisitions.

The broker believes Magellan can generate an EPS CAGR of circa 20% in FY18 and FY19, and that puts the stock on an attractive price/earnings (P/E) multiple of around 15 times for FY19.

“We are supportive of the recent acquisitions (2%-3% accretive in their first full year) noting that Airlie leverages MFG’s retail distribution expertise and Frontier brings in house a talented team and will prevent MFG’s US distribution expenses ballooning out in future periods,” added Credit Suisse, who has an “outperform” rating and price target of $29 on the stock.

These aren’t the only compelling buys at the large-end of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index. There are other attractive buying opportunities among blue-chip stocks, according to the experts at the Motley Fool.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking 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 Scott Phillips.

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