BlackRock’s Stock Has Rallied 76% Over Recent Months, Can It Grow More?

by Trefis Team
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BlackRock stock (NYSE: BLK) lost more than 34% – dropping from $499 at the end of 2019 to around $327 in late March – then spiked 76% to around $570 now. This implies it’s 14% higher than the start of the year.

There were two clear reasons for this:  The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the asset valuations in the securities markets dropped. This could negatively affect BlackRock revenues as it drives the majority of its revenues from investment advisory, administration fees, and securities lending revenue, which are charged as a percentage of Assets under Management (AuM). The multi-billion-dollar Fed stimulus provided a floor, and the stock recovery owes much to that.

But this isn’t the end of the story for BlackRock stock

Trefis estimates BlackRock’s valuation to be around $620 per share – about 10% above the current market price – based on an upcoming trigger and one risk factor explained below.

The trigger is an improved trajectory for BlackRock’s revenues over the second half of the year. We expect the company to report $15.1 billion in revenues for 2020 – around 4% more than the figure for 2019. Our forecast stems from our belief that the economy is likely to open up in Q3. Further, the rally in the securities market, after a multi-billion dollar fed stimulus in late March, has improved the asset valuations. This is beneficial for BlackRock as it charges its fees revenue as a percentage of Assets under Management (AuM), which constitutes a significant chunk of its top line. The company has also benefited from positive net-inflows – around $100 billion in the second quarter of the year, and the momentum is expected to continue in the coming months. Additionally, easing of lockdown restrictions in most of the world is likely to help consumer demand, benefiting the overall business scenario. Overall, we see the company reporting an EPS of around $29.30 for FY2020 – slightly higher than the year-ago period.

Thereafter, BlackRock’s revenues are expected to further grow to $16.1 billion in FY2021. This is likely to translate into higher adjusted net income, which coupled with lower expected share count due to stock repurchases, will lead to an EPS figure of $32.05 for FY2021.

Finally, how much should the market pay per dollar of BlackRock’s earnings? Well, to earn close to $32.05 per year from a bank, you’d have to deposit about $3500 in a savings account today, so about 110x the desired earnings. At BlackRock’s current share price of roughly $570, we are talking about a P/E multiple of around 18x. And we think a figure closer to 19x will be appropriate.

That said, asset management is a risky business right now. While growth looks possible, change in current market sentiment can hurt the near-term prospects. What’s behind that?

BlackRock is the world’s largest asset management firm, with Assets under Management (AUM) of almost $7.4 trillion (as on 31st December 2019). The company’s business model is very sensitive toward movement in asset prices. While the broader markets are on a growth trajectory (up 45%) since the March 23 low, any further deterioration in the economic condition or a sudden uptick in coronavirus cases can reverse the momentum. This could hurt BlackRock’s revenues due to a drop in asset valuations driven by net market losses.

Something similar is visible across BlackRock’s peer – Morgan Stanley. Its asset and wealth management arms have seen an increase in Assets under Management (AuM) over the last two quarters, and we expect the bank’s AuM to grow in FY2020 as compared to the previous year. Overall, Morgan Stanley’s stock currently has a stock price of around $51 but looks slated for an EPS of around $5.02 in FY2021.

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