BlackRock’s Shares Present Sizable Upside Potential With Q3 Results Announcement Around The Corner

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The year 2018 has been a fairly negative one for BlackRock (NYSE:BLK), with the asset management giant’s shares sliding from an all-time high of nearly $600 in January to the current level of below $430. This roughly 30% decline in value for the world’s largest asset manager is primarily due to industry-wide headwinds from the ongoing price wars, as the secular trend of investors shifting their cash to low-cost ETFs from actively-managed fund offerings eats into the bottom line. Fidelity’s decision to introduce a line of zero-fee index fund offerings in August marked the beginning of a new chapter in the asset management industry, and will put pressure on already dwindling profit margins for all incumbents going forward.

But the sell-off in BlackRock’s shares over recent weeks has been overdone – especially the 7% slump earlier this week following a downgrade in its price estimate by Morgan Stanley (it should be noted that Morgan Stanley still maintains a price target of $600 for BlackRock’s shares). The sell-off looks overdone, and presents an attractive upside opportunity ahead of a potentially strong Q3 earnings announcement slated for Tuesday, October 16. We expect BlackRock to report revenues of $3.7 billion for the quarter, and an EPS figure of $7 (ahead of consensus revenue and EPS figures of $3.68 billion and $6.93 respectively), and maintain a $550 price estimate for BlackRock’s shares as detailed in our interactive model for the company. We detail our key expectations below.

You can also access our full coverage of BlackRock here

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Key Expectation #1: Assets Under Management Will Resume Growth

BlackRock is the largest asset manager in the world, with $6.3 trillion in assets under management (AUM) at the end of Q2 2018. The company saw its asset base shrink slightly in Q2 despite decent inflows for the period due to unfavorable changes in valuation across asset classes. However, with the equity market resuming its rally in Q3, and with valuations in debt markets also being upbeat, BlackRock is expected to report a notable uptick in total AUM this time around.

As has been seen over recent years, the single biggest driver of growth in AUM should remain BlackRock’s iShares exchange-traded fund (ETF) offerings – especially equity iShares. According to data compiled by ETF.com, BlackRock’s total U.S.-listed ETFs grew from $1.37 trillion in size at the end of June 2018 to almost $1.45 trillion by the end of September – a sequential increase of over 5%. Although Fidelity’s zero-fee passive funds likely led to some outflows from corresponding offerings from BlackRock, we expect the impact of this on the total AUM to be mitigated by the ongoing trend of inflows into passively-managed funds over recent quarters.

Based on this, we estimate BlackRock’s total asset base to increase from $6.3 trillion at the end of Q2 2018 to $6.35 trillion at the end of Q3 2018. Taken together with a small decline in fees as a percentage of AUM, this should result in BlackRock’s advisory fees increasing slightly from $2.94 billion in the previous quarter to $2.95 billion now. For full-year 2018, we expect advisory fees to cross $12 billion as detailed in the chart below.

Key Expectation #2: Focus On Cutting Costs Will Play Key Role In Boosting Bottom Line

As an improvement in advisory fees and continued growth in revenues from BlackRock Solutions (primarily the Aladdin platform) drive growth in the top line, seasonally lower compensation expenses coupled with the company’s efforts to reduce operating costs will have a positive impact on operating margins for the period. We expect BlackRock’s operating margin to improve from 39.9% in the previous quarter to almost 40.5% in Q3 2018.

For full-year 2018, this should translate to an EPS figure of $28.40 based on our forecast for total revenues and shares outstanding as detailed below. It should be noted here that the net margin for 2017 was unusually high in 2017 due to one-time tax gains recorded in Q4 2017.

You can find additional info in our interactive dashboard for BlackRock

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