Brokers upgrade Macquarie (ASX:MQG) share price targets despite profit warning

The Macquarie Group Ltd (ASX: MQG) share price retreated for a second day following its shock profit warning. Is the pullback a buying opportunity?

Shares in the investment bank declined 0.6% to $119.48 during lunch time trade when the S&P/ASX 200 Index (Index:^AXJO) is holding at breakeven.

Macquarie share price hit by profit warning

The drop in the MQG share price today takes its fall from grace to just over 5% this week after management warned of a 35% slump in first half FY21 profit.

This stands in contrast to management’s previous guidance of profits being slightly down. What is also a shock is that the profit downgrade is not what investors have come to expect from the Millionaires’ Factory.

Macquarie built its reputation on under promising and overdelivering!

Price target upgrades

But brokers are pretty relaxed about the profit downgrade and some have even increased their price target on the stock.

Morgan Stanley is one that lifted its fair value estimate on Macquarie to $133 from $120 a share.

Management’s profit downgrade actually came in better than what the broker was anticipating. This led Morgan Stanley to lift its FY21 and FY22 earnings forecast by 1% to 2%.

Larger earnings skew to latter half

It’s also expecting a larger earnings skew to the second half. This means Macquarie’s full year profit is anticipated to fall a more modest 17% in FY21 from the year before.

“While timing of lumpy items is clouding underlying earnings trends, we raise our earnings forecasts on lower impairments and more confidence in asset realisations,” said the broker.

Meanwhile, UBS also upgraded its price target on Macquarie share price to $125 from $105 a share.

While it believes the high level of uncertainty that’s fuelled by the COVID-19 pandemic will impinge on transaction activity, which is the earnings blood for Macquarie, it thinks the bank has a growth lever it can pull.

Profit boost from asset sale

This is Macquarie’s 70% stake in data security software company Nuix that it can sell to boost profits.

“Given the increase in Nuix’s revenue and earnings, as well as the multiples currently being paid for technology companies, we believe this could lead to a substantial ‘gain on sale’ for MQG,” said UBS.

“In this scenario, we would expect MQG to sell its position down in tranches, which would help support gains on sale revenue in coming periods.”

Morgan Stanley reiterated its “overweight” recommendation while UBS kept is “neutral” rating on Macquarie.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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