Does BlackRock’s Stock Still Have Room For Growth?

by Trefis Team
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BlackRock’s (NYSE: BLK) stock has rallied more than 32% since the beginning of 2019 to settle above $500 now. We believe that BlackRock’s stock looks fairly valued, and has little upside potential in the near future given secular changes to the global asset management industry that will weigh on profits going forward. Trefis details the key components of BlackRock’s valuation in an interactive dashboard, along with our forecast for full-year 2019.

In Q3 2019, BlackRock reported Total Revenues of $3.69 billion, up 3% y-o-y. The improvement can be attributed to a 3% increase in base fees coupled with a 30% y-o-y jump in BlackRock solutions & advisory revenues, partially offset by a 20% drop in performance fees. Further, the company reported $84 billion in net inflows for the quarter primarily towards its fixed-income and cash management fund offerings. While equity market valuations have improved in recent months, government policy uncertainty and poor earnings outlook are likely to constrain future growth. Additionally, deteriorating bond yields could further hamper the growth potential of its fixed-income segment. This could hurt the market value of BlackRock’s investments – resulting in a decrease in assets under management and a consequent reduction in fees. Additionally, as market volatility increases, we expect investors to be more risk-averse and reducing investments. On the other hand, increasing investments from emerging markets like India & China could boost BlackRock’s revenues in the subsequent years.

We can break down the BlackRock’s stock price estimate into 4 factors:

Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio

Despite Drop In Equity Investments, BlackRock Revenues Would Cross $14.3 Billion For Full Year 2019

  • Total Revenues have increased by 25% from $11.4 billion in 2015 to $14.2 billion in 2018, and could grow 1% y-o-y to $14.3 Billion in 2019.
  • BlackRock’s growth over the last 4 years was mainly driven by a 4.9x increase in Distribution Fee & Other income (in turn a result of the adoption of a newer accounting standard) coupled with a 26% jump in Fixed Income Investment division.
  • Moving forward, we expect the asset management giant to report sluggish growth in 2019 due to challenging macroeconomic scenario and asset management headwinds.
  • The top line will likely grow 1% y-o-y, driven by a 7% jump in fixed-income Investments coupled with 5% growth in multi-asset class investments, partially offset by 5% y-o-y drop in Equity Investments.
  • Notably, advisory fees and alternate investments are expected to increase by 10% and 13% on a year-on-year basis for full-year 2019.

We capture the factors that have driven changes in revenues of BlackRock’s segments over recent years along with our forecast for the next three years in a separate interactive dashboard.

 

Adjusted Net Income Would Remain Around The Figure For 2018

  • BlackRock is expected to have a Net Income of $4.3 billion in 2019 which is largely the same as the figure for the previous year.
  • This would be driven by better operating margin (up 70 bps) compared to 2018, partially offset by a higher expected tax rate.

 

This Lends Support To A $501 Price Estimate For BlackRock’s Shares

  • BlackRock has regularly invested in share repurchases to boost shareholder returns. It is expected to repurchase shares worth $1.9 billion in 2019.
  • Lower outstanding shares would drive the BlackRock’s EPS figure to $27.38 in 2019 – up 3% y-o-y.
  • Using an 18.3x P/E Multiple on expected 2019 EPS of $27.38, this works out to our price estimate of $501 for BlackRock’s stock.

Details about how BlackRock’s P/E multiple compares with peers JPMorgan, BNY Mellon and State Street are available in our interactive dashboard.

 

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