The Magellan Financial Group Ltd (ASX: MFG) share price raced to an all-time high today and is now ahead of most analysts' share price targets including those at famous investment bank Goldman Sachs.
Goldmans noted March was a "strong" month for the international equities manager in terms of funds under management (FUM) inflows with total FUM up 4.5% for the month. According to the analysts inflows contributed 1.5% of these returns and market movements (equity and FX-adjusted asset inflation) contributing the difference of 3%.
Over the quarter FUM grew 11.8% which is a strong result for Magellan especially as it should boast operating leverage where revenue growth rises faster than costs, which of course translates to super-charged profit growth.
As a result of its own analysis Goldmans increased its 12-month price target on Magellan shares to $35.90 using a 50% discounted cash flow and 50% price-to-earnings multiple blended valuation model.
Notably Goldmans is using a 16.4x price-to-earnings multiple in assessing its two year forward earnings per share, which is high compared to its peers, but not excessive in my opinion given the robust FUM growth and operating leverage in the business.
Of course estimating earnings per share two years out for any business is tricky and for Magellan the actual result could vary wildly depending on, inter alia, investment performance, FUM flows, and the value of markets generally.
For example if markets tumble then these estimates are likely to be too high, no matter how good investment performance. While vice versa applies if we have a strong couple of years for equities and Magellan keeps winning FUM.
Therefore as an investor in the financial services space it's important to focus on the long term and underlying business quality as you cannot control the markets. In other words it's important to control your investments, rather than let your investments' performance control you.
For example if Magellan shares dropped on short term weakness due to any escalation in the U.S. China trade war it wouldn't make sense to sell and you'd be too late anyway. Moreover, if the underlying business was still performing well in winning FUM you could ride out the weakness or even buy more if its operating metrics still ticked the boxes.
