Macquarie Group (MQG) stunned the market – but not a few savvy observers – with a dramatic profit downgrade this morning in its operational briefing. In opposition to the perma-bull institutional mood surrounding world markets, the Millionaire Factory said its 2012 profit would be 25% lower than 2011’s figure.
This equates to a possible $717 million profit, well below consensus at $870 million (and completely kicks the $1 billion plus consensus for FY13). Strangely, the consensus forecast hasn’t moved in the last 3 months, with all major analysts recommending a hold or strong buy on the stock.
So why the downturn?
Investment banking and trading are the key, with a 35% and 55% reduction in earnings in these respective divisions, showing the macro impact of Europe, lower trading volumes, lower primary and secondary securities issues (i.e IPO’s and capital raisings) and movement in foreign exchange (FX) rates.
From the briefing the following chart shows the weakening IPO and secondary issues, across even emerging/Asian markets:
And even in the age of High Frequency Trading (HFT), trading volumes and values on the main bourses are well below averages:
This update puts a dampener on expectations of the company’s future value, in my opinion, and clearly shows that its success is dependent upon external factors, not its own acumen. As we showed in our last review of Macquarie, earnings per share of the business since the GFC have been woeful, as return on equity (ROE – the return on shareholders capital) plummets to near term deposit levels:
The upside potential for the Millionaire’s Factory is wholly dependent on a return to a secular bull market, with increased trading volume and security issues returning to pre-2007 levels. And maybe that explains why the market has responded with only a 0.5% fall in the share price post the release of the briefing and partially explains the following long term price behaviour:
Macquarie are still going ahead with their share buyback this year, up to a possible $800 million, which is likely to buoy their share price in the medium term, but one wonders given the low ROE and prospects for the business that this money be better spent acquiring a more profitable investment. Five year term deposits?