The share price of Macquarie Group Ltd (ASX: MQG) looks well placed to keep outperforming over the next few months as the chance of the investment bank delivering a better-than-expected profit result has just gone up, according to Morgan Stanley.
Shares in Macquarie are up 1.3% at $125.50 against a flat performance by the financial sector and a 0.2% increase in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index in after lunch trade.
The bullish prediction by Morgan Stanley comes after news that Santos Ltd (ASX: STO) agreed to acquire Western Australian Quadrant Energy in a circa $3 billion deal.
Macquarie owns 22% of Quadrant and the broker estimates it will book around a $250 million profit from the transaction.
"This is almost of half of A$580m total gains on sale we have baked for 1H19E. This compares to the ~A$650m HY average gains on sale in FY17 and FY18," said Morgan Stanley who has an "overweight" recommendation on the stock with a price target of $130 a share.
"This gives us more confidence that 1H19E profit can hit our forecasts and hence exceed consensus expectations. We are looking ~9% y-o-y [year-on-year] 1H19E profit growth and are ~4%pts ahead of consensus."
While Morgan Stanley might be tipping a better profit number than most other analysts, it doesn't mean the "Street" has low expectations for the group.
Consensus is forecasting earnings per share growth of around 11% in FY19 and this contrasts with management's guidance of a flat full year result for the current financial year.
But even Macquarie's 1QFY19 update is contradicting the guidance as operating group contribution was up on the same time in the last financial year, which Morgan Stanley believes implies a y-o-y growth of over 10%.
On the other hand, no one should be particularly surprised by this given management's track record of under promising and over delivering.
It's worth paying a premium for that alone when you compare the track record of other financial/wealth management groups like AMP Limited (ASX: AMP) and Perpetual Limited (ASX: PPT).
Macquarie will release its first half profits in late October. The stock is up 43% over the past 12 months and is on a FY19 consensus price-earnings multiple of under 16 times.
That's about the average for the ASX 200 index when Macquarie should be trading at a higher valuation, in my opinion.
I suspect Macquarie will be trading at $150 before the year is out.
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