Macquarie makes money buying big infrastructure assets like toll roads. (It has a 98-year lease on the Chicago skyway, for example.) But the bank doesn’t actually own these assets, and it dramatically overpays for many of them, Cramer said. Instead, it creates infrastructure funds that own the assets and it sells shares of those funds to investors. Macquarie then manages – and at times, controls – those funds, he said. In that regard, the bank profits from management fees that are determined by the size of its funds. It also makes banking fees on the deals its funds make.
Cramer’s problem is this: Macquaire relies very heavily on debt to finance these huge infrastructure purchases it builds its funds around. It uses debt to fund about 85% of the purchase price and capital expenditures but it’s hard to tell exactly how much debt is on the books at Macquarie because the debt is held at the asset level. In essence, Macquarie has all this debt that isn’t being reporting. That is a giant red flag to Cramer.
To make this situation even more dubious to Cramer, the debt tends to increase because Macquarie’s assets don’t generate enough cash and the company pays huge dividends to its shareholders. The debt is there … but it’s not there. When there’s any kind of smoke and mirrors on a company’s balance sheet, it’s time to get rid of that stock, Cramer said.
Macquarie relied heavily on cheap credit to finance its deals and grow its funds by adding assets, but the credit market has dried up worldwide. Cramer believes the credit crunch is likely to shrink Macquarie’s funds, and by extension, its assets. That will mean lower management fees for the bank and fewer deals, thus less in banking fees. “Only when all this becomes apparent will the stock will really get hurt,” he said.
So with that in mind, Cramer urged anyone invested in Macquarie to get out while the getting is good. “Let’s take it off the table and forget about it,” Cramer said. “Macquarie, you’re out.”
Questions for Cramer? firstname.lastname@example.org
Questions, comments, suggestions for the Mad Money website? email@example.com