Raising BlackRock Estimates As Profits Swell On Market Recovery

One thing is clear from BlackRock’s (NYSE:BLK) results for the first quarter of the year – it is only going to get more difficult for competitors like State Street (NYSE:STT) and Vanguard, to keep up with the global asset manager’s pace when it comes to the growing size of their asset base. The company now boasts of more than $3.9 trillion in assets under management, and the remarkable growth in its iShares ETF offerings over recent months, only points towards continued additions to the asset portfolio over quarters to come. ^[1]

The fact that BlackRock’s total revenue and earnings figure for the period are lower than those for the previous quarter are outweighed by the fact that Q1 saw investors shifting their preference from debt funds to equity funds. This presents higher revenue potential in the future as equity funds attract more fees than their debt-based counterparts. Moreover, the company incurred one-time charges of $51 million this quarter. These factors, and the stronger-than-expected growth in size of assets managed under the company’s passive equity-based funds as well as equity iShares, prompted us to raise our price estimate for BlackRock’s stock from $250 to $267.

See our full analysis for BlackRock

BlackRock Continues To Unlock Value By Tapping The Strong Demand For iShares

Since BlackRock acquired iShares from the erstwhile Barclays Global Investors in late 2009, the offering has seen the fastest growth among all the investment products the company has to offer – with assets managed by iShares jumping from under $500 billion at the end of 2009, to almost $800 billion now. And this time around, the brisk growth in iShares assets was driven by a strong preference for their equity version – generating more revenues. Equity iShares rose in value by a good 10%, from $535 billion at the end of Q4 2012, to $589 billion at the end of Q1 2013. The figure for fixed-income iShares dipped slightly, but still remains at the $190-billion level it has been at for three quarters now.

It Has Taken The First Step Towards Better Cost Efficiency

BlackRock’s business strategy for the future involves targeting the untapped retail investor market, and to be able to do so, the company has to get more aggressive with pricing its product offerings. But this can only be possible if it first reins in associated operating costs, or else it would be sacrificing profitability for market share. We described this in detail in our article Here’s Why BlackRock Strikes The Right Note With Its Cost-Cutting Plan, and we believe that the fact BlackRock took the bullet and initiated the downsizing process is in the overall interest of the organization, as well as the investors.

While costs for the quarter were inflated due to one-time compensation and severance costs, the benefits will begin showing as early as next quarter. Any cost cutting measure presents a considerable upside to BlackRock’s shares due to the sensitivity of its value to its operating expenses – something that can be best understood by making changes to the chart below.

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1. First Quarter 2013, BlackRock Earnings Release, Apr 16 2013 [↩]