BlackRock Stock Is Trading 10% Below Its Fair Value

[Updated 03/26/2020] BlackRock Valuation Update

BlackRock stock (NYSE: BLK) has rallied more than 120% since the March 23 lows of the last year and at its current price of $728 per share, it is around 10% below its fair value of $830 – Trefis’ estimate for BlackRock’s valuation. BLK, the world’s biggest asset manager, has seen a meteoric rise in its stock price since the March 2020 bottom, partially due to earnings beating expectations in each of the last four quarters and partially driven by headwinds in other industries due to the Covid-19 pandemic. The company reported net fund inflows of around $391 billion in the year, which took its total Assets under Management (AuM) to $8.68 trillion at the end of December 2020 – a 17% y-o-y increase. This led to an 11% y-o-y growth in the full-year 2020 revenues to $16.2 billion.

The exchange-traded fund (ETF) issuers like BlackRock, Vanguard, and Charles Schwab, etc. are in the middle of an aggressive price war to maximize their market share and edge out the competition. In a recent development, BlackRock has announced it will reduce fees across a suite of nine US equity style investing ETFs with cumulative assets of $7.6 billion. This is likely to make BlackRock’s offerings more competitive, attracting more fund inflows and compensating for the loss of fee revenue. Further, with the expected mass availability of the Covid-19 vaccine and potential recovery in the economy, we expect BlackRock’s revenues to touch $18 billion by FY2021 – up by 11% y-o-y. The net income margin is likely to remain around the same level as the 2020 figure, leading to an EPS of $35.78 for FY2021. This coupled with a P/E multiple of around 23x, will lead to the valuation of $830.

[Updated 11/13/2020] BlackRock Stock Is Near Its Fair Value

Having gained more than 100% since the March bottom, BlackRock stock (NYSE: BLK) is close to its near term potential. Trefis estimates BlackRock’s valuation to be around $707 per share – around 5% above the current market price. Despite the Covid-19 crisis, BlackRock, the world’s largest asset manager, has seen its revenues grow in each of the last three quarters on a year-on-year basis. This could be attributed to the recovery rally in global financial markets which improved the asset values and attracted more investor funds. In Q3 2020, BlackRock reported an earnings beat with total revenues of $4.37 billion, up 18% y-o-y. Further, the company reported $129 billion in net inflows for the quarter.

We expect BlackRock’s revenues to further improve in the coming months, mainly driven by higher asset valuations. It is likely to report $15.4 billion in revenue for FY 2020 – 6% above the year-ago figure. Further, its net income is likely to rise by 4% y-o-y, increasing the EPS figure to $30.82 for FY 2020. Thereafter, revenues are expected to touch $16.6 billion in FY2021, mainly driven by growth in equity, fixed income, and alternate investment segments. Further, the EPS figure is likely to improve to $33.95, which coupled with the P/E multiple of just below 21x will lead to a valuation of around $707.

[Updated 07/30/2020] BlackRock’s Stock Has Rallied 76% Over Recent Months, Can It Grow More?

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.

While BlackRock stock may be slightly undervalued, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Home Depot vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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