What's the difference between Commonwealth Bank of Australia (ASX: CBA) and Macquarie Group Ltd (ASX: MQG) shares?
There's no punchline because this is no joke. Both of these financial titans have their own advantages, with different economic characteristics.
My colleague Tristan recently compared the outlook of Commonwealth Bank with Woodside Energy Group Ltd (ASX: WDS). Give it a read. The verdict is intriguing.
A banking giant and a mining giant make for interesting comparisons on the ASX. But what about a comparison between two of Australia's largest banks? Commonwealth vs. Macquarie.
Both have performed well this year, and their share price trajectories are strikingly similar, as seen in the chart below. So, what separates the pair?
Here, we'll weigh up the two ASX heavyweights to help investors make more informed decisions. Let's get to it.
Commonwealth Bank vs Macquarie shares
CBA currently holds the title of Australia's largest company by market capitalisation, valued at more than $268 billion at the time of writing.
Its share price has climbed around 40% this year, bringing its price-to-earnings (P/E) ratio above 28 times, a level considered high compared to the market's historical averages.
Some analysts suggest this valuation may be difficult to sustain. MPC Markets' Jonathan Tacadena noted the Big Four bank share trades on very lofty valuations.
Tacadena also points to the potential headwinds from high interest rates, which could limit profit growth and lead to increased loan arrears. Arguably, this could impact all bank stocks, including Macquarie shares.
Securities Vault observed that, despite a 6% drop in net profit in FY24, investors still bid up the P/E multiple on Commonwealth Bank. (One might expect otherwise with a decrease in profit.)
For those investors with skin in the game, Regal Partners is actually short on CBA shares. The fund manager says earnings growth has stalled, and given the business's current price point, that's a risk.
Regal has a point, too. Say you pay the current P/E of 28x today. This means you're paying $28 for every $1 of the bank's profits. And if earnings growth ceased, one financial theory is that it would take you 28 years to 'break even' on your investment.
Often, investors pay high multiples because, when adjusted for growth, they might actually be cheap.
However, the risk is that expectations for the bank have gotten too high, with disappointment resulting if these demands can't be met.
On the upside? If there's no major change in the valuation of Commonwealth Bank shares. Such has been the case in 2024. Let's see how this stacks up against Macquarie shares.
Macquarie insights
Macquarie shares have lifted a more modest 25% this year to date, but several catalysts have fueled the stock. One was its stake in AirTrunk, which was sold to private equity firm Blackstone Inc. for $24 billion this year.
The second was the result of its asset management and commodities divisions over the previous 12 months.
The company's first-half profits were down 23% compared to the prior half but were up 14% year on year. Meanwhile, assets under management ballooned to more than $916 billion.
As you can see, Macquarie has a slightly different business model from Commonwealth Bank, holding a global set of revenue streams.
That kind of financial firepower isn't earned in the dungeons and lairs of 'conventional' banking. It is earned on a global stage, with associated risk (and capital) at play.
The bank has, in fact, shifted its focus heavily towards large infrastructure and renewable energy investments.
Analysts at Ord Minnett have a buy rating on Macquarie shares with a price target of $245 apiece. The broker says Macquarie has nearly $11 billion in surplus capital, which provides opportunities for future investments and growth. Not to mention dividends for Macquarie shareholders.
Ord Minnett does acknowledge the potential hurdles Macquarie might face in growing revenues, given the current economic climate.
However, it sees opportunities in renewable energy and data centres, two investment pies in which Macquarie has its fists firmly planted.
Even still, the bank is pricey relative to the long-term market average, at 23 times trailing earnings.
CommSec shows that consensus expects 22% growth in earnings to $12 per share next year. If Macquarie shares trade on a 23x valuation, the implied stock price is $276 (23 x 12 = $276).
But if it compresses by about 15% (similar to our CBA example) to 20x, the implied price is $240 (20 x 12 = $240). There's implied growth, but not at the same rate as the business.
CBA vs Macquarie shares: the takeouts
There are arguments on both sides of the coin for CBA and Macquarie shares. Valuation, as with any appraisal, remains front and centre of analysts' minds.
But the future is uncertain, and both banks have surprised to the upside this year. In the long term, both companies present their own set of talking points.
An investor's preference between these two names will ultimately depend on personal circumstances and views on each company's competitive advantages.
