BlackRock Worth $213 on iShares, International Growth

Last month, BlackRock (NYSE:BLK) reported its third quarter earnings, including a record net income figure. While the asset manager’s stock has fluctuated around the $185-$190 mark since then, we believe that the company’s shares are worth significantly more than that – 15% higher to be precise, at around $213 per share. In this article, we elaborate on the main factors that lead us to this conclusion.

See our complete analysis of BlackRock’s stock here

We recently made some notable changes to our analysis of  BlackRock in order to provide the best possible insight into the value of the company, which manages assets worth nearly $3.7 trillion worldwide. These changes go beyond those warranted by the Q3 2012 earnings release, and above all include a switch in our underlying valuation method from the Discounted Cash Flow (DCF) model to the Dividend Discount Model (DDM) to allow better comparison between our analyses of the firm and of its competitor State Street (NYSE:STT). We have also refined the historical annual figures of the company’s assets under management (AUM) to the average of the reported AUM at the end of each quarter, as opposed to an annual average – thus reducing volatility and obtaining a better estimate of the investment advisory fees charged by BlackRock for its various asset classes in the past.

The Benefits of Scale and Scope

BlackRock’s gargantuan size in terms of assets under management allows it to benefit from economies of scale better than its competitors. As the largest asset manager with presence in many asset classes across the globe, BlackRock can offer more investment choices in debt, equity and even alternative securities to its clients across global financial markets. And the sheer size of its operations empowers BlackRock to dilute costs over a significantly larger asset pool and investor base than competitors – thereby offering investors these options at more competitive fees.

BlackRock has capitalized on this time and again in the past to woo investors even during difficult economic times. We believe that this strength will serve the company well as the economy recovers in the coming years, as top-line figures should see strong growth from a steady increase in the asset base. This should lead to an improvement in the company’s margins as well.

BlackRock’s Hit The Right Note With iShares

One of BlackRock’s most popular investment offerings is iShares, which allows clients to invest in equity and fixed-income exchange traded funds (ETFs) listed in 25 countries. According to the company’s annual report, iShares was the top asset gatherer globally in 2011. Its continuing popularity leads us to believe that the total assets managed under iShares could easily grow by around 6-7% annually over the next few years – cementing its role as the biggest source of revenue for BlackRock. The company managed $679 billion in assets as a part of iShares at the end of Q3, split roughly as 75%-25% between equity iShares and fixed-income iShares.

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