What’s Driving The Rally In BlackRock’s Stock?

Asset management leader BlackRock’s (NYSE:BLK) share prices have risen significantly over the last few days, jumping from $282 at the beginning of last week to breach the $300-mark for the first time, before going on to post an all-time high of almost $308 earlier this week. This represents a gain of roughly 9% within five days of trading. So what is responsible for this surge in investor interest for the financial giant?

There are several factors at play here. The most prominent among them is BlackRock’s strong performance figures for Q3 2013 which were reported on October 16, with the company beating expectations by coming very close to the record operating performance it displayed in the second quarter. ^[1] Despite the uncertain economic conditions seen over the quarter, BlackRock’s fee revenues remained strong, with the company’s total assets under management rising to $4.1 trillion by the end of the quarter on the back of its extremely popular iShares ETF offerings. The tight expense-management measures also helped the bottom line grow 5% compared to the figure for the same quarter last year, and 3% sequentially.

Another factor is a recent Schwab report that forecast strong growth in the global demand for ETF products over the coming years – a notion that found considerable support from BlackRock’s CEO Larry Fink in the earnings conference call. As we have pointed out on many occasions in the past, the higher fee potential for ETF products compared to their passively-managed counterparts represents a notable upside to revenues in the future.

And finally, we believe that the Fed’s ongoing debate over whether or not to classify BlackRock as a systemically important financial institution (SIFI) also had a hand in giving the share prices a leg up. While we recently argued that the company would do better without the SIFI tag, such a classification also signals the importance of a financial institution to the economy at large – something that can be seen as a positive from an investor’s perspective.

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

See our full analysis for BlackRock

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. In fact, something that can be seen in the results for this quarter is the growing investor preference for BlackRock’s equity iShares offerings compared to its active as well as passive equity funds. Over the quarter, investors pulled about $10.8 billion in assets out of BlackRock’s active-equity as well as indexed-equity funds, while they poured in almost $21.1 billion into its equity iShares. That’s more than three-fourths of the $27.7 billion in inflows for BlackRock this quarter.

A $142 billion appreciation in the value of underlying securities across various funds, and an additional $54 billion gain from foreign exchange movements, helped BlackRock notch 6% growth in its assets under management – from $3.86 trillion at the end of Q2 2013 to $4.1 trillion at the end of Q3.

Another important aspect of BlackRock’s results for the quarter was a predominantly flat operating expense figure compared to the previous quarter (as adjusted for one-time costs). The asset manager has been working hard to keep expenses under check to ensure profitability as it increases its focus on the retail investor market – something we highlighted earlier this year in our article Here’s Why BlackRock Strikes The Right Note With Its Cost-Cutting Plan. Any cost-cutting measure presents a considerable upside to BlackRock’s shares due to the sensitivity of its value to its operating expenses. This can be understood clearly by making changes to the chart below.

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1. BlackRock Reports Quarterly Diluted EPS of $4.21, or $3.88 as Adjusted, BlackRock Press Releases, Oct 16 2013 [↩]