As part of its regular investor communications program, Macquarie Group Ltd (ASX: MQG) provided an updated forecast for its financial year 2016 earnings – and it's bad news. At least, bad news if you're not a shareholder:
- First half 2016 ("1H16") profits are expected to come in approximately 40% higher than in the first half of 2015
- This indicates a profit of around $964 million
- Earnings per share will probably be up slightly less than 40% thanks to the recent capital raising
- Second half 2016 earnings are expected to equal first half for a total of ~$1,930m, up 19% on 2015
- Forecasts depend on many factors including market conditions, foreign exchange rates, cost of capital and potential regulatory change and uncertainty
Macquarie's earnings are driving higher particularly as a result of growing performance fees from Macquarie Securities and Macquarie Asset Management, which have performed particularly well in recent years.
Additionally, earnings are bolstered by recent acquisitions such as the aircraft purchase (see link above) and the weak Australian dollar – Macquarie earns roughly 70% of its revenue from overseas. Investors also gain a hidden benefit in the form of Macquarie's strong financial position, which requires no further capital raisings unlike the recent developments at Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC).
Macquarie appears slightly overpriced with a Price to Earnings (P/E) ratio of around 16, although its record of shrewd asset purchases and conservative, long-term thinking are likely to stand shareholders in good stead over the next decade. More importantly, the bank is still quite exposed to falling markets, which would have a heavy impact on profitability.
That said, the bank is clearly in favour with investors and Macquarie shares could well rise higher after today's announcement.
