Why BlackRock’s Stock Looks Overvalued

BlackRock’s (NYSE: BLK) stock rallied more than 33% in 2019, with the company’s share price averaging just above $487 for the year. Trefis details the key components of BlackRock’s valuation in an interactive dashboard, along with our forecast for full-year 2020, and estimates the fair value of BlackRock’s stock to be $550 per share – 5% lower than the current market price. We believe that the company’s stock is overvalued, and a price correction is on the cards for the asset management giant’s stock. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current fiscal year.

Fiscal Q4 2019 Earnings Recap and FY 2020 Guidance

• BlackRock surpassed consensus estimates for both earnings and revenues in Q4 2019 results
• In Q4 2019, it reported Total Revenues of $3.98 billion, up 16% y-o-y. The improvement can be attributed to an 11% increase in base fees coupled with a 139% y-o-y jump in Investment advisory performance fees.
• The company reported $129 billion in net inflows for the quarter, primarily driven by $75 billion of iShares inflows.
• Overall, BlackRock reported Total Revenues of $14.54 billion in FY 2019, up by 2% y-o-y. This growth was mainly driven by higher base fees and 24% growth in technology services revenue, reflecting continued momentum for its Aladdin platform, as well as the impact of eFront acquisition.
• Further, the asset management giant reported $429 billion in net inflows for the year led by strong fixed-income and cash flows and record activity in illiquid alternatives.
• The equity and debt market valuations have improved in recent months, thanks to the announcement of the U.S-China trade deal (phase 1) and improvement in government bond yields.
• Going forward, we expect the asset management giant to benefit from improvement in the macroeconomic scenario and drive revenues from equity and fixed-income investment divisions.

We arrive at the stock price estimate for BlackRock as:

Stock Price = (Total Revenue x Net Income Margin / Shares Outstanding) x P/E Multiple

Equity And Fixed Income Investments Would Drive Growth In BlackRock’s Revenues For Full-Year 2020

• Total Revenues have increased by 30% from $11.2 billion in 2016 to $14.5 billion in 2019 and could grow 10% to $15.9 Billion in 2020
• This would be driven by a 12% jump in equity investment division coupled with an 8% growth in fixed-income investments.
• The growth in Equity Investments would mainly be due to improvement in Investment Advisory Fee as a % Active Equity Investments and higher AuM (Assets under Management) in Equity iShares.
• On the same lines, fixed-income investments would grow on the back of higher AuM in active fixed-income investment and fixed income iShares categories.
• Notably, the advisory fee is expected to increase 15% y-o-y for full-year 2020.

Our Interactive Dashboard Analysis, ‘BlackRock revenues: How Does BlackRock Make Money?’, captures the factors that have driven changes in revenues of BlackRock’s segments over recent years along with our forecast for the next two years.

Although Operating Margin Are Likely To Shrink, Higher Revenues Should Help Drive Growth In Net Income 

• Net Income grew from $3.2 billion in 2016 to $4.5 Billion in 2019, and we expect it to increase by 9% in 2020.
• While adjusted net income is expected to increase, operating margin would shrink by 50 bps on a year-on-year basis, as higher expenses would more than offset the increase in revenues.
• This would reduce the adjusted Net Income Margin figure by 5bps, from 30.8% in 2019 to 30.7% in 2020.

This Lends Support To A $550 Price Estimate For BlackRock’s Shares

• BlackRock has regularly invested in share repurchase to boost shareholder returns. Its share repurchase program is likely to touch $1.6 billion for the full year 2020.
• Higher adjusted net income, coupled with a steady decline in share count, should result in BlackRock’s EPS figure increasing to $31.75 in 2020.
• Using a 17.3x P/E Multiple on expected 2020 EPS of $31.75, this works out to our price estimate of $550 for BlackRock’s Stock.

Our interactive dashboard – ‘BlackRock Valuation: Expensive or Cheap?’, provides details about how BlackRock’s P/E multiple compares with peers BNY Mellon and JPMorgan.

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