BlackRock Should Have Done Much Better In Q2 Compared To The Unusually Slow Q1

by Trefis Team
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BlackRock (NYSE: BLK) will report its second quarter 2019 earnings on Friday, July 19. Consensus figures point to negligible change in revenues for the world’s largest asset manager compared to the year-ago period, while EPS is expected to drop 2% y-o-y to $6.51. Per Trefis, BlackRock’s stock has a fair value of $490, which is roughly 5% higher than the current market price. We have captured trends in BlackRock’s Earnings over recent quarters in an interactive dashboard along with our expectations for full-year 2019. You can modify Trefis forecasts to see the impact of changes on BlackRock’s valuation. Additionally, you can see more Trefis data for financial companies here.

A Quick Look At BlackRock’s Revenue Sources

BlackRock reported $14.2 billion in Total Revenues in FY 2018. This included 7 revenue streams.

  • Equity Investments: $6 billion in FY 2018 (42% of Total Revenues) – Represents fees generated by BlackRock through its equity fund offerings to retail and institutional investors
  • Fixed Income Investments: $3.1 billion in FY 2018 (22% of Total Revenues) – Represents fees generated by BlackRock through its debt fund offerings to retail and institutional investors
  • Multi-Asset Class Investments: $1.2 billion in FY 2018 (8% of Total Revenues) – Fees from funds that employ a combination of equity, fixed income and alternative investments.
  • Alternate Investments: $1.1 billion in FY 2018 (8% of Total Revenues) – Represents fees generated by BlackRock through its alternative investment fund offerings (including currencies, commodities and real estate) to retail and institutional investors
  • Cash Management: $0.6 billion in FY 2018 (4% of Total Revenues) – Represents fees generated by BlackRock through its money market fund offerings to retail and institutional investors
  • Advisory Services: $0.8 billion in FY 2018 (6% of Total Revenues) – Fees from risk management, investment analytics, investment system and advisory services
  • Distribution Fee and Other Revenue: $1.4 billion in FY 2018 (10% of Total Revenues) – Fees from mutual funds for bringing in investments, sales commission, fund accounting services and transition management fees

How Have BlackRock’s Revenues & Expenses Changed Over Recent Quarters?

  • In Q1 2019, BlackRock reported Total Revenues of $3.35 billion, down by 7% y-o-y. This decline was mainly caused by 5% drop in base fees despite AUM inflows of $65 billion across indexed, actively-managed and cash management funds.
  • Notably, Technology Services revenue grew by 11% in Q1 due to surging interest in BlackRock’s proprietary Aladdin platform.
  • Total expenses were down by 4% y-o-y to $2.1 billion driven by lower compensation cost compared to the year-ago period.

BlackRock’s Key Revenue Drivers

Assets under Management (AuM): In Q1 2019, BlackRock’s AuM increased by 3% y-o-y to $6.5 trillion. Further, the company’s popular iShares ETF offering maintained its leadership position in the industry and attracted $65 billion in net inflows in the first quarter. iShares will continue to drive growth in BlackRock’s asset base going forward.

Total Investment Advisory Fees: It is a key revenue driver and has contributed more than 80% of total revenues in the last five quarters. In Q1 2019, base fee was down by 5% y-o-y to $2.8 billion mainly due to lower equity valuations in 2018 and continued dollar appreciation. We expect it to improve in subsequent quarters and report a positive growth figure for full-year 2019.

BlackRock’s Outlook For Full Year 2019

  • BlackRock is expected to report $14.6 billion in Total Revenues for 2019, which is 3% more than previous year, thanks to steady growth across its fund offerings.
  • Further, advisory fee is expected to increase by 5% y-o-y for full-year 2019.
  • Notably, fierce competition in the asset management industry, and the secular trend of investors shifting their cash to low-cost investment options have resulted in a steady reduction in fund expense ratios over recent years. This trend is expected to continue over the foreseeable future, and will weigh on revenues.
  • At the same time, Total Expenses are expected to increase by 4% y-o-y due to moderate increase in Compensation Fees and General & Administrative Expenses – resulting in a marginal reduction in Net Income for the year.
  • BlackRock has regularly invested in share repurchases to boost shareholder returns. This trend is likely to continue in subsequent quarters and help its EPS figure reach $26.92 for FY 2019.
  • EPS of $26.92 coupled with our forward P/E multiple of 18.2x represents a price estimate of $490 – a figure roughly 5% ahead of the current market price.

Do not agree with our forecast? Create your own forecast for BlackRock’s valuation by changing the base inputs (blue dots) on our interactive dashboard.

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