The Magellan Financial Group Ltd (ASX: MFG) share price has roughly doubled in just 2019 if you include the 73.8 cents per share interim dividend it paid out in February 2019 which is a remarkable return for a mid-sized funds management company.
So what's behind this?
The main reason for the rise is because the stock was materially undervalued throughout 2018 on any number of conventional valuation metrics and even on the assumption that equity markets only tracked sideways in the near future.
In fact I must have written dozens of articles over 2018 on the topic and even explaining how the stock was actually cheaper than it had been in almost five years, despite its share price rising in that time.
How can that be?
Although Magellan was delivering double digit revenue and profit growth and was obviously well positioned to deliver a strong report for the six-month period ending December 31 2018 (where it grew its dividend and profit 66% and 62%) respectively the market was not bidding the shares any higher.
Why?
Over 2018 and before the whole funds management sector took a material de-rating to profit multiples that investors were prepared to assign to fund managers due to the growing rise of low-fee exchange traded and index tracking funds putting fee and market share pressure on active managers.
The de-rating was generally a fair enough assumption and Magellan's price-to-earnings multiple got de-rated particularly harshly despite it producing continually strong operating performance.
In other words the same company is cheaper at a share price of $25 on a price-to-earnings multiple of 15 than a share price of $22 on a price-to-earnings multiple of 22.
As you'd only have to wait 15 years to get paid $25 back, rather than 22 years to get $22 paid back using the above multiples as reference points.
I picked up some more Magellan shares for around $23 in the middle of 2018 confident that the profit growth would ultimately drag the share price far higher, although I didn't expect it to double so quickly.
I was also correct in thinking that the market and some less-experienced sell-side brokers in covering buy-side managers were too negative on the stock and earnings multiple.
Outlook
Of course past share price performance means nothing today and Magellan's earnings multiple has been re-rated higher on the back of some strong investment performance likely to generate significant performance fees and a big final dividend for the fiscal year ending June 30 2019.
On top of that markets have been strong over the short term with a little luck never hurting anyone's investing returns.
I'd probably rate the stock a hold at today's price of $44.80 given equity markets have run hard and may have gotten complacent about the US Fed's thinking on the outlook for monetary policy. As such buyers may find a cheaper entry point before August.
Elsewhere another top-performing money manager in Macquarie Group Ltd (ASX: MQG) is due to hand in its full year profit report tomorrow, while Pendal Group Ltd (ASX: PDL) has bombed on the back of a weak trading update.
