Record ETF Inflows Likely To Drive BlackRock’s Profits To All-Time High

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BlackRock (NYSE:BLK) is positioned to report its best ever quarterly performance for the fourth quarter of 2014, as the global asset management giant rides on the back of continued growth in its iShares business. The world’s largest asset manager, which is slated to report its results for Q4 as well as full-year 2014 on Thursday, January 15, saw record inflows of $102.8 billion in its popular iShares exchange-traded fund (ETF) offerings for the year. [1] Considering the sharp equity market rally over Q4 2014 as well as the company’s efforts to cut costs, this points to the most profitable quarter ever for BlackRock.

We believe that BlackRock is poised to report total quarterly revenues in excess of $3 billion and net quarterly earnings of $1 billion for the first time ever this quarter – resulting in a diluted EPS just shy of $6 for the quarter (GAAP basis). Also, the company’s total assets under management (AUM) are likely to cross $4.65 trillion for the end of the period, from the $4.5 trillion figure reported at the end of Q3 2014.

See our full analysis for BlackRock

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iShares Will Remain Primary Driver

BlackRock reported $2.5 billion in fund-related fee revenues for the third quarter of the year, with ETFs raking in a little more than one-third of this figure. Including other revenue sources, the company’s total revenues last quarter were $2.85 billion. Notably, the company saw its assets under management shrink from $4.59 trillion in Q2 2014 to $4.52 trillion in Q3 2014 due to unfavorable movements in market valuations as well as exchange rates. As these negative trends were largely absent over the fourth quarter, the strong ETF inflows and steady increase in the equity valuations over the end of the year are likely to boost asset values considerably.

The table below details the changes in BlackRock’s various fund offerings at the end of each quarter from Q1 2013 to Q3 2014, and also includes our estimate for each asset class at the end of Q4 2014. It must be noted that BlackRock does not provide separate figures for assets under its multi-asset class as well as alternative investment iShares. Accordingly, the total iShares asset base is slightly higher than what is obtained by adding up those managed under equity iShares and fixed income iShares.

(in $ bil) Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014(E)
Active Equity Funds 291.8 280.3 297.5 317.3 314.9 320.8 304.9 320.0
Passive Equity Funds 1,112.1 1,115.5 1,197.7 1,282.3 1,309.1 1,367.7 1,338.0 1,350.0
Equity iShares 588.7 577.3 653.5 718.1 724.0 774.1 757.3 780.0
Active Fixed Income Funds 648.9 631.8 646.2 652.2 665.2 689.7 683.2 700.0
Passive Fixed Income Funds 407.2 392.6 408.5 411.1 435.8 450.5 451.2 470.0
Fixed Income iShares 189.5 180.9 182.8 178.8 188.0 200.5 199.1 215.0
Multi-asset Class 283.6 289.3 308.1 341.2 353.2 374.5 373.1 375.0
Core Alternatives 69.9 70.2 72.8 85.0 87.9 88.8 88.3 90.0
Currency and commodities 37.6 26.4 30.6 26.1 27.6 28.2 25.4 26.0
Total Long-Term AUM 3,629.3 3,564.5 3,797.8 4,012.2 4,105.6 4,294.7 4,220.4 4,326.0
Cash Management 261.3 252.6 260.1 275.6 263.5 268.4 281.0 280.0
Advisory 45.8 40.0 38.5 36.3 31.8 30.5 23.2 20.0
Total AUM 3,936.4 3,857.0 4,096.4 4,324.1 4,400.9 4,593.6 4,524.6 4,626.0

The steady increase in assets across the various asset classes is readily seen from the table. The table also shows why iShares have become the mainstay of BlackRock’s business model – especially equity iShares, which have grown nearly 30% over the period and are now responsible for more than 25% of the company’s total revenues. While a bulk of the asset base is formed by passive equity funds (29% of total AUM), the relative importance of iShares can be gauged by the fact that equity iShares generate annual revenues equal to 0.3% of the fund assets on average – 6 times the 0.05% figure for passive equity funds.

Of the $102.8 billion in fresh ETF inflows for the year, well over 80% was for ETFs listed in the U.S. [1] A majority of the new money was attracted by the string of low-cost ETFs BlackRock has been pushing over recent months. Also, we expect strong growth in BlackRock’s fixed income iShares for Q4 2014 as the company gained from the heavy outflows that PIMCO witnessed in late September.

Operating Margins Should Gain From Cost Efficiency Measures

BlackRock has been targeting the largely untapped retail investing market over recent years through its low-cost fund offerings, but to ensure profitability from this strategy in the long run the company has had to take a tougher look at its operating costs. The company’s efforts to rein in costs have made a tangible impact on the bottom line over recent quarters. The ratio of adjusted operating expenses to total revenues hit a lowest-ever figure of 57.3% for Q3 2014, as BlackRock’s revenue growth outpaced the increased spending. We believe that this figure will improve further in Q4 2014.

The primary driver is the company’s plan to reorganize its sales force into two separate groups in order to better target wirehouses and independent broker-dealers (see BlackRock’s Sales Force Reorganization Plan Will Improve Operating Efficiency). The plan, which began in November, targets improvements in long-term profitability – something we believe should already have started helping the bottom line. You can see how sensitive BlackRock’s share price is to its operating margins by making changes to the chart below.

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Notes:
  1. BlackRock ETF funds draw record $102.8 billion in new money, Reuters, Jan 5 2015 [] []