BlackRock Inc. (NYSE:BLK) is set to release earnings tomorrow. We expect the company to report an increase in profits compared to the third quarter of 2010 as the firm’s continued efforts to increase investments by retail investors should help offset losses from the market turmoil in the quarter. BlackRock’s competitors Charles Schwab (NYSE:SCHW) and State Street (NYSE:STT) have already reported earnings this week that beat most estimates.
We have a price estimate of $188 for Blackrock’s stock, which is over 20% above the current market price.
BlackRock looking to expand scope
BlackRock, the world’s biggest money manager, is looking to broaden the scope of its operations by increasing its presence in the retail market. For example the company is planning to expand its Exchange Traded Fund (ETF) offering. Q3 2011 has seen increased efforts by the company to attract individual investors, such as launching campaigns to educate investors and offering the first alternative fund for retail investors. This is likely to result in increased retail inflows, and a consequent increase in revenue.
Market turmoil and low interest yields to hurt earnings
Blackrock’s investment advisory and administration fees are sensitive to fluctuations in equity market prices, foreign exchange rates and interest rate spreads. In light of the market turmoil in August, primarily due to uncertainty in the Eurozone and the low interest rate environment, we expect assets under management to be negatively affected, thus reducing the revenue from investment advisory and administration.
Looking beyond Q3, the search for higher returns due to shrinking interest yields has led the company to increase its investment in high yield bonds, including sovereign debt. As the economic outlook has improved, Blackrock has been investing in securities such as Italian government bonds.  Should economic conditions improve this could be a very lucrative move for the company. However it does increase the firm’s exposure to the troubled Eurozone going forward.Notes:
- BlackRock Is Buying Italian Debt Amid Improved Outlook, Bloomberg [↩]