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Why the Magellan share price is soaring today

The Magellan Financial Group Ltd (ASX: MFG) share price is up 9% to $26.68 today on top of a 4% gain yesterday after the Hamish Douglass led international equities manager told the market it expects to earn $42 million in performance fees for the half-year ending December 31 2018.

It also told investors that average funds under management for the half-year period ending December 31 2018 were expected to come in ,at $72 billion, compared to $53.6 billion in the prior half-year period.

Yesterday I described the stock as “the cheapest I’d seen it in 5 years” and I’m not surprised to see it rise today on the back of a broker upgrade by Morgans and potentially others.

The reason I think the stock is cheap today is that its earnings multiple was de-rated over the course of 2017 despite the group still delivering strong operational, revenue, dividend and profit growth.

Over 2017 active fund managers everywhere were sold down by investors (especially those like Magellan on higher price earnings multiples) perhaps justifiably as investors worried that exchange traded or passive investment funds would take market share from active managers and pressure their fees.

As a result of the price earnings (PE) multiple de-rating Magellan’s valuation fell although its growth remained strong. E

Even at $26.68 today it changes hands for 17x trailing earnings per share (backing out, inter alia, Airlie acquisition costs) and is on track to deliver double-digit profit growth in FY 2019 despite the bear market in US stocks over the final quarter of 2019.

Generally I don’t like companies backing out acquisition costs as it’s a prevalent practice on the ASX used in an attempt to paint earnings in a better light by dozens of otherwise mediocre ASX companies to avoid, however, I’m prepared to cut Magellan some slack as a high-quality operation that is not acquisitive by nature.

The trailing yield is also 5% with the strong performance fees likely to support another big dividend payout in FY 2019.

Magellan has now reached the scale with $72 billion in FUM where market movements are more important than flows over the short term with regard to the profit outlook of the business.

As such if international equity markets recover over the first half of 2019 I expect the stock will go over $30 or potentially higher if the market decides to re-rate its earnings multiple higher again.

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

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 Scott Phillips.

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