The share price of investment bank Macquarie Group Ltd (ASX: MQG) gave up morning gains as investors await an update from management tomorrow.
Could one of our best loved blue-chips be poised to upgrade its FY19 profit guidance at its annual general meeting tomorrow given its habit of under-promising and over-delivering.
The stock slipped 0.5% to $125.04 a share in late afternoon trade as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) slipped 0.4%, but Macquarie has rallied 46% over the past year when the broader market is up by less than 10%.
This makes Macquarie the best performing large cap in the financial sector with our share market operator ASX Ltd (ASX: ASX) and insurers Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN) taking the next spots, respectively.
Macquarie's golden run is likely to continue, but investors may not get the profit upgrade they are clamouring for. What we are certain to get though is a trading update for the June quarter (the first quarter in its financial year ending March 31).
Analysts aren't expecting anything special from the investment bank given the good results it achieved in the same period last year, which makes the comparables tougher to beat. But make no mistake, the market is expecting Macquarie to beat its forecast of a flat FY19 compared to the last financial year.
I just think it's out of character for management to upgrade its guidance this early in the financial year. Morgan Stanley has also noted that the bank has only once in the past eight years changed its guidance at its AGM.
Macquarie is walking a tightrope of expectations and could become a victim of its own success. While it is doing all it can to keep its poker face to downplay expectations, history has taught analysts to expect more – and that's why FY19 profit consensus forecast is for a 6% increase over last year.
What this essentially means is that the pressure is on for Macquarie to deliver growth in excess of this if it wants to retain its share price premium!
The signs are still good for the investment bank to outperform given the strength in global markets, investors' appetite for transactions (like IPOs), and the jump in merger and acquisition (M&A) activity.
The stock certainly isn't cheap unless it can pull a growth rabbit out of its hat given that the whole sector is trading cheaper thanks to the woeful share price performance from sector heavyweights like AMP Limited (ASX: AMP) and Commonwealth Bank of Australia (ASX: CBA).
But I certainly wouldn't be looking to buy these so-called "value stocks" in financials given the political pressure and weakening operating environment.
I suspect this is the reason why investors are not put off by Macquarie's relatively high valuation. It's a case of you get what you pay for.
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