We enjoy covering BlackRock (NYSE:BLK) because it is the industry leader in our favorite industry (asset management). We were pleased that Ignites Europe (Financial Times' subscription only subsidiary that covers the asset management industry) cited our research in an article that firm wrote about BlackRock's $1B stock buyback. We were disappointed that BlackRock only bought $1B of stock from Barclays instead of the $6.1B that Barclays (NYSE:BCS) was selling but for some reason, BlackRock's management felt it could generate a favorable image in the investment community and make it more well-known to investors by having the majority of the Barclays shares sold on the secondary market in a road show. At least BlackRock has repurchased $583M worth of its shares (gross) in the last three quarters and increased its dividend per share by 12% in 2013 versus 2012 levels.
Source: Morningstar Direct
Considering that BlackRock's share price snapped its two-year streak of price declines in 2012 and its total return has exceeded 66% since its May lows of $160.25, we're content with management's decision here. BlackRock's shares have significantly outperformed the 34% that the S&P Financial Sector SPDR ETF (NYSEARCA:XLF) achieved during this time period. We believe that the biggest catalyst that snapped BlackRock out of its stagnating somnolence was Vanguard's decision to switch the benchmark on its Vanguard Emerging Markets ETF (NYSEARCA:VWO) from the MSCI Emerging Markets Index to the FTSE Emerging Markets Index. While Vanguard made this change to try to save money for its clients on the index licensing fees, it ended up waking up BlackRock from its slumber and filled it with a terrible resolve.
Source: Morningstar Direct
We were pleased that BlackRock once again beat consensus EPS expectations by $.07 on an adjusted basis and its GAAP Reported earnings beat the consensus adjusted EPS expectations by $.04. BlackRock's shares are beginning to approach fair value based on its 60% rise from its May 2012 lows of $160. However, BlackRock is certainly not overvalued based on its valuation metrics of 18X Trailing 12 Months EPS, 16.2X 2013 Consensus estimates and 14.3X 2014 Consensus estimates, especially because it is expected to generate 12% long-term growth in its annual EPS. This compares favorably with the 3.2% annual EPS growth that the S&P 500 has posted over the last five years and the mid-single digit growth rates that the S&P 500 is expected to post in 2013 and 2014. Here is our latest analysis of BlackRock's recent performance.
BlackRock grew its Q1 2013 adjusted EPS by 15.5% versus Q1 2012. The EPS growth was due to a 9% revenue increase in its revenue, a 90bp year-over-year increase in its operating margin, a 50bp year-over-year reduction in its average tax rate and a 4% reduction in its weighted average share count. BlackRock manages over $3.9 Trillion in AUMs, which is well ahead of its competitive peers in the asset management industry
Source: Morningstar Direct
Blackrock's AUM increased by 3.8% on a linked-quarter basis in Q1 2013 after its AUMs increased by 3.2% in Q3 2012 & Q4 2012. Increases in AUM were due to primarily continued market appreciation. BlackRock also added $40B from new subscriptions, which were entirely from its index-oriented products. One headwind for BlackRock was that the strong US Dollar resulted in a $55B headwind due to foreign exchange translation effects. We also noted that BlackRock has over $35B in institutional client assets that it will begin to assume management of starting in Q2 2013, compared to $45B in Q1 2013, Q4 2012, $55B in Q3 2012 and $30B in Q2 2012.
BlackRock also reported strong adjusted operating margins of 40%, as the company continues its expense management discipline in the wake of the volatile revenue environment. BlackRock saw its greatest base fee revenue growth from its passive products (up 19%), its active fixed income products (11.8%) and its multi-asset class asset allocation products (2.1%). Although its base fee revenues from its active equity products and its alternative asset products was flat on a year-over-year basis, its performance fees increased by more than 60% due to successful performance on a disposition-related opportunistic fund.
BlackRock has been continuing its efforts in maintaining its leadership position in the asset management marketplace. BlackRock recently established a European Infrastructure Debt investment team in Europe to meet demand from insurers seeking long-dated and predictable income at attractive levels. In February, it announced that its CFO Ann Marie Petach would be joining BlackRock Solutions as Senior Managing Director in the Client Solutions business. Ms. Petach will help to develop critical client relationships and business initiatives with a special focus on solutions offerings for public and private pension funds. Replacing Ms. Petach as CFO of BlackRock is Gary Shedlin, who served as a longtime strategic and financial advisor to BlackRock while serving as Morgan Stanley's Vice Chairman of Investment Banking and a Managing Director in the Financial Institutions Group.
BlackRock hired Swiss Re's CIO David Blumer to head up its European, Middle East and Africa division. BlackRock's current head of EMEA James Charrington decided to take a step back from running its EMEA business day-to-day and will remain with the firm through engaging on broad regulatory issues as BlackRock's primary liaison with the UK government and the Firm's representative on the board of the UK Investment Management Association. The last notable recent hire for BlackRock was the appointment of Gerardo Rodriguez Regordosa (Mexico's former Undersecretary of Finance and Public Credit) as Managing Director and a senior member of the Firm's emerging markets leadership team. Mr. Rodriguez will be supporting BlackRock's Emerging Markets business and product development strategy.
We've already discussed how BlackRock is working to expand its brand through its "New World of Investing" campaign, as well as our opinion of it in relation to PIMCO's New Normal program. We've seen an increasing amount of advertising by BlackRock promoting its "New World of Investing" campaign in order to increase its brand awareness amongst fund investors. As retail assets under management for long-term investment products only represent about 11% of BlackRock's AUM, we believe that BlackRock has potential to increase its brand recognition amongst individual investors.
Last quarter, BlackRock's most notable product initiative involved reducing the fees on six of its largest ETFs in order to regain market share from Vanguard. We're pleased to see BLK engage in more proactive product positioning this quarter. Despite facing competitive challenges from Vanguard during the year, BlackRock led the global exchange traded product category with $85.3B new net fund flows, including $61B in its US iShares products. BlackRock also struck a strategic alliance deal with Fidelity in which Fidelity would distribute BlackRock's iShares ETFs, create new ETF portfolio strategies using iShares as components within its managed account offering (Portfolio Advisory Services). In addition, as part of Fidelity's growing sector-based business strategy, the company has established a strategic relationship with BlackRock whereby the firm will help support Fidelity's future passive sector investment management efforts. BlackRock also introduced 31 ETF funds for the Belgian market and expanded its factor ETF product line-up with the launch of its iShares Enhanced ETFs, which are managed using BlackRock research rather than tracking an index, and the iShares MSCI Factor ETFs, which seek to track MSCI Risk Premia Indices. These products were designed in partnership with Registered Investment Advisors (RIAs) and institutional investors, specifically public pensions, to provide a broader range of solutions to help manage equity exposures and risk.
In conclusion, we are maintaining our holding in BlackRock. While we would prefer to wait for a pullback to add more shares, we can see why it has bounced back by 65% over the last eleven months. We believe that BlackRock's ability to generate strong cash flows and industry leading presence in asset management result in it being a strong core holding for investors. We can't for the life of us see why the industry leader in asset management is trading at the same Price to Earnings ratio as the S&P 500, especially due to the fantastic business model that asset management firms enjoy. We believe that BlackRock's somnolent performance with regards to asset fund flows is coming to an end and it will be positioning itself amongst the asset management industry's blue chip firms. In closing, we believe that Vanguard dumping MSCI's indexes was pennywise because it saved its customers a few basis points in expenses but pound-foolish because it provided an opening for BlackRock to provide customers the ability to invest in the MSCI Emerging Market Index versus the lesser known FTSE Emerging Markets Index. We hope that Vanguard has savored its moment as the golden child of the ETF industry because we see BlackRock regaining its momentum.
Disclosure: I am long BLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.