The Macquarie Group Ltd (ASX: MQG) share price has failed to deliver anything special in the past year. However, that could be set to change if what one analyst believes is true.
Shares in the investment bank are up 5.73% compared to a year ago. Likewise, the S&P/ASX 200 Index (ASX: XJO) is 6.4% better off over the same timeframe.
This means Macquarie Group has not been a market-beating stock for the past 12 months. What matters now is what the company can achieve for investors from today. According to Morgan Stanley's Andrei Stadnik, it could be much more than most think.
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What is the market missing?
Macquarie shares have flatlined since December 2021. As depicted below, it's a clear departure from the previous 'up and to the right' trajectory over the preceding decade.
However, based on Stadnik's forecast, a rally in Macquarie's share price could be on the cards. The executive director of equity research considers Macquarie Group the best option within Aussie financial shares — but why?
Well, it comes down to operating leverage.
A company holds high operating leverage when its revenue can increase with a much smaller cost increase. In other words, high operating leverage is present when profits outpace revenue growth. This occurs when a business has high fixed costs and low variable costs.
Stadnik believes Macquarie is in such a position, stating:
We think consensus is missing the operating leverage from rising revenues.
In turn, the Morgan Stanley analyst reckons net profits after tax (NPAT) in FY25 at Macquarie will increase by 27% — a drastically different forecast than the 17% consensus among analysts.
Interest rates could also play an important role. Stadnik added, "Stable interest rates remove a headwind to asset prices and deal activity, while falling rates present a tailwind, in our view."
The theory is that anything other than rising interest rates could see Macquarie cash in on asset sales.
Downside risk to the Macquarie share price
There's a catch when it comes to operating leverage… it can go in the other direction.
As covered by Bernd Struben, US core inflation data came in above estimates overnight at 3.8%. Now the prospects of a June rate cut by the Federal Reserve are being written off.
The risk is inflation proves harder to tame, demanding higher interest rates. It may seem unlikely, but it could mean the inverse of Stadnik's expectations — lower asset prices, making that operating leverage work against Macquarie.
Nonetheless, the analyst has pencilled in a $225 target on the Macquarie share price, 15.6% above the current $189.89 price tag. If all goes well, such that NPAT rises 10% in FY25, Stadnik would dial up the target another 11.64% to a price tag of $261.
