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Citigroup just downgraded this well-loved ASX blue-chip to “sell”

Brendon Lau
shocked, surprised

The Macquarie Group Ltd (ASX: MQG) share price is tumbling with the broader market, but there’s another reason for the sell-off.

The investment bank slumped 2.3% to $142.50 in the last hour of trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index lost 1.4% to trade below 7,000 points.

Just about every sector apart from healthcare is trading in the red as investors are selling first and asking questions later.

Downgraded to “sell”

Fear that the spreading coronavirus will bring global growth to its knees is driving the panic, but Macquarie is also being hit by a downgrade from Citigroup.

The broker lowered its recommendation on the stock to “sell” from “neutral” and slapped a target price of $123.50 per share on Macquarie.

“Since earnings troughed in 2012, MQG commenced a stellar share price run, recently hitting an all-time high,” said Citi.

“Since 2013, MQG’s PE has ranged traded around ~14.5x. Nevertheless, despite earnings set to slow, MQG’s share price has re-rated to a ~17x P/E.

“We estimate the share price to be implying ~15% earnings upside to forward consensus earnings.”

Bull vs bear case

There are some reasons to feel optimistic about Macquarie’s earnings. Low interest rates are boosting asset prices and providing a tailwind for performance fees. Macquarie is beating its peers on transaction volumes and its expertise in green energy assets is unmatched and timely.

But the broker points out there are more headwinds than tailwinds and noted that management is forecasting earnings to be slightly down in FY20 compared to the previous financial year.

This means you shouldn’t expect Macquarie to post another record year given the high bar set in the previous period. The broker also pointed out that unseasonal weather will weigh on gas revenue in the US and the resolution of gas storage issues will inventory and remarketing profits fall.

Hang on for short-term volatility

“Despite a number of positive longer-term drivers, near term challenges to earnings are more tangible in our view,” said Citi.

“With the upcoming Operational Briefing (Feb 11th) unlikely to generate a material upgrade, the stock offers scope for disappointment which could trigger a de-rating back to long-term averages.”

Foolish takeaway

I think Macquarie is a good stock to hold for investors with a longer-term view. The short-term is likely to be challenging though as the stock is highly correlated to investment markets.

This means an ongoing sell-off in global stock indices will weigh heavily on Macquarie. But if the stock retreats significantly from here, it will present a good buying opportunity.

The post Citigroup just downgraded this well-loved ASX blue-chip to “sell” appeared first on Motley Fool Australia.

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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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020