BlackRock’s Scale And Equity Business Supports $217 Fair Value

by Trefis Team
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Shares of BlackRock (NYSE:BLK) have not fared very well in the last two months, with their prices falling from nearly $210 at the beginning of April to just over $170 now – a loss of almost 20% of their value. While the deteriorating debt situation in Europe and a difficult outlook for asset managers in the coming quarters have contributed to the rapid decline, we still believe that the shares are undervalued – something evident from our $217 price estimate for the stock. Below we highlight the two factors that in our opinion lend the most support to our estimate for BlackRock’s value.

See our complete analysis of BlackRock’s stock here

BlackRock’s Sheer Size Gives It A Competitive Edge

With assets under management of nearly $3.7 trillion, BlackRock is the world’s largest asset manager with a significant global presence. The scale of its operations allows it to spread costs over a larger asset pool than any of its competitors, essentially allowing it to offer its services and products at more competitive fees.

The substantial diversification in its product offerings also allows it to tailor investment products to its clients’ needs. That, combined with an enviable track record, ensures that BlackRock does not have to work too hard to retain its customers while maintaining fund inflows even during difficult economic times.

Focus On Equity Markets Ensures Higher Fee Revenue

At the end of 2011, BlackRock had investments worth $420 billion in equity-based exchange traded funds (iShares), actively managed equity investments worth $275 billion and $845 billion of passive (indexed) equity investments. This represents investments in excess of $1.5 trillion in equity products. In contrast, the firm’s investments in fixed-income products totaled $1.25 trillion, while those in multi-class assets stood at $225 billion.

Investments in equity products generally attract higher returns compared to fixed-income products, albeit with a higher degree of risk involved. This allows BlackRock to demand higher fees for its equity products. The parity can be understood from the fact that the company charges a management fee of more than 0.6% for active equity investments compared to less than 0.2% for active fixed income investments.

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