BlackRock’s Growth To Come From Retail Investors, Expense Management

by Trefis Team
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BlackRock (NYSE:BLK) is the world’s largest asset manager by far, with the company managing a whopping $4.1 trillion in assets at the end of the third quarter. It continues to grow its globally diversified operations at a brisk rate each quarter – primarily thanks to its extremely popular iShares line of exchange-traded funds (ETFs). Its unrivaled position in the global asset management industry and the significant growth potential has resulted in BlackRock’s shares steadily increasing to new highs, jumping from just above $200 at the beginning of the year to over $300 in mid-October and has remained around that level since then.

So what are the reasons behind the strong investor sentiments that are driving this rally in BlackRock’s shares? We believe that there are three primary factors: BlackRock’s increasing focus on retail investors, new potential markets opened up by regulatory requirements, and improving operating margins.

We maintain a $296 price estimate for BlackRock’s stock, which is slightly below the current market price.

See our full analysis for BlackRock

Increasing Focus On Retail Investors

BlackRock is the undisputed leader in the asset management industry when it comes to managing money for institutional investors. However, when it comes to the highly fragmented retail segment, BlackRock hasn’t really been able to gain a strong foothold yet. This is why retail investors contribute just a fraction of BlackRock’s total product offering.

While the company has shown its inclination to grow its business through acquisitions whenever such a chance has come up, it is important for BlackRock to explore avenues of organic growth as well, keeping long-term sustainability in mind. This explains the company’s decision to focus on grabbing a larger share of the retail asset management industry. Over the last few months BlackRock has come up with several low-cost iShares aimed at the retail market, and they have seen steady demand.

BlackRock’s expansion in the retail asset management segment should provide a boost to its equity- as well as debt-based iShares over the years to come. You can understand the impact of faster growth in equity iShares on BlackRock’s share value by making changes to the chart below.

New Market Opportunities From Regulatory Changes

In recent years, U.S. financial regulators have put in a lot of effort to make regional and community lenders reduce their exposure to mortgage-backed securities. An indirect outcome of this has been an increase in the demand for debt-backed ETFs from regional and community banks. Given that there are roughly 7,000 such banks in the country with a bulk of their $1.5 trillion investments in mortgage-backed securities, this represents a huge potential market for asset managers like BlackRock. [1]

These banks will be a major factor in pushing the size of assets under BlackRock’s debt-based iShares over the years to come.

Improving Cost Efficiencies

The table below shows the overall improvement in non-interest expenses (as a percentage of revenue) for BlackRock over the last two years. While expenses are likely to grow in the future given BlackRock’s plans to expand its operations geographically, we believe that revenue growth will outpace the rate at which expenses will grow over coming years. This will result in a steady improvement in operating margins for the company.

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013
64.4% 64.1% 70.1% 63.4% 62.7% 64.6% 61.0% 63.1% 61.2% 63.0% 61.7%

As you can see by making changes to the chart below, which represents BlackRock’s actual and forecast operating margins, an increase of just two percentage points in margin figures by the end of our forecast period would push the price estimate up by more than 5%.

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Notes:
  1. BlackRock turns to regional and community banks in ETF push, Reuters, Nov 14 2013 []
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