3 Reasons Why BlackRock’s Stock Looks Undervalued

by Trefis Team
Rate   |   votes   |   Share

The asset management industry took a beating over 2018, as the secular trend of investors shifting their cash to low-cost ETFs from actively-managed fund offerings continued to pick up steam, as the ongoing price war among incumbents intensified. The resulting pressure on profit margins, coupled with the sell-off in shares across sectors in December 2018, drove the stock price of industry leader BlackRock (NYSE:BLK) down from almost $600 in January 2018 to $360 by the end of the year – a collapse of nearly 40%. Although the company’s shares have recovered to around $410 now, we believe that it is still trading at a significant discount to its fair value of $490 – a figure we arrived at using our interactive valuation dashboard for BlackRock.

As we detail below, there are three key factors that lend support to our belief that the stock is substantially undervalued: 1) BlackRock’s iShares offerings continue to witness an extremely strong inflow of funds; 2) Margins are poised to improve with operating costs leveling out; and 3) The current market cap to AUM ratio for BlackRock is at the lowest level in seven years.

You can also access our full coverage of BlackRock here

Inflows Will Continue To Drive Revenue Despite Reduction In Fund Expense Ratios

The notable decline in valuation across asset classes towards the end of 2018 had a sizable impact on BlackRock’s asset base, which shrunk from a record $6.4 trillion at the end of Q3 2018 to below $6 billion by the end of Q4 2018. This market-linked decline in total assets under management (AUM) clouds the fact that BlackRock roped in nearly $50 billion in net new investments for the quarter. This include more than $81 billion in net inflows across BlackRock’s iShares exchange-traded fund (ETF) offerings, which more than made up for the roughly $38-billion in combined outflows from its actively- and passively-managed fund offerings. This trend has been seen for several quarters now, and highlights the industry-wide shift in investor preferences. BlackRock’s investors appear to be moving their cash from other fund offerings from the company, as well as from competitors, into iShares.

BlackRock is already the industry leader among ETF providers by a large margin. While the reduction in fund expenses has a tangible impact on the top line, it also ensures that price-sensitive investors don’t switch to competitors – helping BlackRock maintain strong inflows. And with a market share of over 30% in the global ETF industry, BlackRock has done well to leverage its size to drive additional inflows over the years.

Total Operating Costs Should Level Off

As an improvement in advisory fees and continued growth in revenues from BlackRock Solutions (primarily the Aladdin platform) drive growth in the top line, an overall leveling out of compensation expenses – coupled with the company’s efforts to reduce other operating costs – should have a positive impact on operating margins. Notably, the company recently announced plans to reduce its workforce by 500 (about 3% of its headcount).

While BlackRock has been incurring steadily higher General & Administrative expenses over recent quarters, and also incurred a one-time restructuring charge in Q4 2018, these costs are expected to grow at a slower rate than revenues going forward. This should have a positive impact on margins for the asset management giant.

Market Cap to AUM Ratio Is At The Lowest Level Since Early 2012

BlackRock currently has a market cap of just under $65 billion. Assuming that the recovery in equity prices over the last few weeks has helped its AUM improve to $6 trillion, this represents a market cap to AUM ratio of about 65/6,000 = 1.08%. While this represents an improvement in this ratio from the figure of just 0.96% when BlackRock’s stock was around $360 in December, it is still notably lower than the average figure of ~1.3% seen since mid-2012. While some of this decline makes sense due to the increasing proportion of lower-fee iShares assets, we expect a modest reversal going forward. As BlackRock’s AUM figure should recover from the negative valuation impact over coming months, the current share price appears low given its historical levels.

We expect BlackRock to report EPS of nearly $29 for full-year 2019. Taken together with a forward P/E ratio of 17x, this works out to a price estimate of $490 for BlackRock’s shares, as detailed below. This is about 20% ahead of the current market price.

You can find additional info in our interactive dashboard for BlackRock

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs
For CFOs and Finance Teams | Product, R&D, and Marketing Teams
More Trefis Research
Like our charts? Explore example interactive dashboards and create your own

Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Be the first to comment!