Here’s what the bulls and bears at Morningstar have to say about the Macquarie (ASX: MQG) share price after the company’s earnings upgrade.
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Macquarie Group Ltd (ASX: MQG) provided an earnings upgrade on 22 February, citing profit would be up 5% to 10% from its “slightly down” guidance just two weeks prior. This update helped the Macquarie share price push 2% higher on the day of the announcement.
Macquarie asset management to drive performance
Macquarie’s earnings are being boosted by the extreme winter weather in North America which has significantly increased client demand for the physical supply of gas and power.
Macquarie generates part of its income by connecting producers and consumers and has considerable investments in energy and oil storage, and a commodities trading business that benefits from higher prices.
In a research report released on 23 February 2021, Morningstar stated that it believes Macquarie’s asset management business is well-placed to capitalise on growth in global infrastructure and renewable energy investment over the next five years. It cited low cash rates as being likely to spur investment, as investors chase income and drive up asset prices.
With established capabilities and investment records, the large asset managers in the space continue to garner the bulk of inflows into the category. In its report, Morningstar outlined the global infrastructure spending tailwinds which are likely to drive growth for Macquarie asset management. These include commentary from the American Society of Civil Engineers which estimated that around $5 trillion is needed to be spent on infrastructure by 2025, covering ageing transportation and electricity assets as well as schools and airports.
Furthermore, Morningstar noted that Macquarie’s Australian home loan book also continues to grow well ahead of the market, benefitting from its investment into digital capabilities. Morningstar highlighted that Macquarie’s operating efficiency coupled with consistent lending standards is being rewarded in the mortgage broker channel.
Macquarie sources a larger share of its funding from business customers and cash management accounts, not only helping to keep funding costs low, but providing the capital required to grow its loan book.
Morningstar maintains its Macquarie share price estimate
Despite the tailwinds for Macquarie’s businesses, Morningstar believes that the one-off uplift to earnings due to volatile commodity demand and prices has no bearing on longer-term forecasts. On 23 February, the broker maintained its $125 fair value estimate for the Macquarie share price.
The bull and bear case for the Macquarie share price
Morningstar’s report provided a breakdown of what factors could sink or swim the Macquarie share price.
- Macquarie’s position as the largest infrastructure asset manager globally leaves the firm well placed to benefit from underlying demand for assets and investors searching for sustainable income streams.
- The expansion into funds management has produced more sustainable, less capital-intensive, annuity-style income, which will prevent a GFC-like shock to earnings and return on equity.
- A focus on niche segments of investment banking allows Macquarie to continue increasing earnings globally.
- Without the support of falling cash rates, it is unlikely Macquarie can continue to achieve double-digit returns in infrastructure, resulting in lower performance fee income.
- Macquarie invests directly in unlisted assets and businesses, and despite being diversified, a large bankruptcy or asset write-down would still have an impact on group profits.
- A large investment portfolio makes it more difficult for investors to track and identify issues early.
At the time of writing on Monday, the Macquarie share price is trading 1.86% higher at $145.13.
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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.