Blackstone: Post-Earnings Reaction Is Baffling

| About: The Blackstone (BX)

Summary

Economic Net Income (ENI) beat street's estimates with all segments outperforming.

$14.7 billion raised in the third quarter; fundraising expected to continue through to 2017 and 2018.

Expiry of fee holidays will see an uptick in the fee earning AUM of about $65 billion.

Concerns over economic outlook will be mitigated by committed exits through to 1Q17.

I am currently long Blackstone and am looking to accumulate further on dips.

Introduction:

Blackstone (NYSE:BX) delivered yet another spectacular quarter despite the volatile markets seen in the third quarter. For the third quarter, BX managed to deliver strong returns of $0.57 ENI/unit with distributable earnings coming in at $0.48 and declared distribution of $0.41 per share (which I have just received). Despite this, BX remains range-bound. I think the market fears of BX's cyclical earnings risk in the event of a market downturn is a little too excessive, and I have accumulated additional shares of BX over the last few days. BX's ability to continue raising capital in a difficult market condition like this and their time tested ability in generating returns in any market condition gives me confidence in the long-term prospects of the company.

Solid Returns on Key Business Metrics

Referring to the table below, BX managed to reverse the negative ENI seen in the same quarter last year caused by the market volatility we experienced when the Chinese devalued their currency sharply last year. The results also beat the Bloomberg consensus of $0.48. Whilst there are slight concerns by the street on the lower DE compared to last year, I think these concerns are way overblown.

Key Business Metrics ($'000 except per unit)

3Q16

3Q15

Economic Net Income ("ENI")

$686,984

-$415,926

ENI/unit

$0.57

-$0.35

Distributable Earnings ("DE")

$593,028

$691,534

DE/unit

$0.48

$0.58

Total AUM

$361,040,173

$333,925,521

Fee Earning AUM

$267,757,727

$240,939,356

Click to enlarge

According to BX's filings, the performance fees from their Real Estate arm (their most significant) jumped nearly seven times compared to a year ago. Credit was also up over 6% in both performing and distressed strategies. BX is also more active on the distribution front, with realizations of $13.6 billion in the quarter.

Solid Outlook Moving Forward

BX continued to demonstrate their strong fundraising ability, raising $14.7 billion in the third quarter alone. Moving forward, management has guided for fundraising in 2017-2018 to remain roughly at the same pace as 2016. This is positive for fee-related earnings for 2017 and 2018. The expiry of fee holidays for some funds is also going to be positive, more on this below.

The outlook for DE also looks promising moving forward as the fee holiday for some of their funds like the BCP VII ends. In total, they are expected to have over $65 billion of management fee eligible AUM earning fees. These are positive for FRE growth, which management has guided to grow at double digits for 2017.

It is also noteworthy that BX has had realizations of $13.5 billion in the third quarter. The partial sale of Hilton was also announced, driving $12 billion of profits at 3x of BX's cost. The outlook for the next two quarters, 4Q16 and 1Q17 is also expected to be stable with about $0.40 distributable earnings per unit already in committed exits.

Considerations

I think the main consideration of the street at this point is the expectations for slower unrealized carry growth moving forward, especially if the economy takes a sudden downturn. Whilst I think there are merits to the above argument, I think the solid track record of BX's management in executing in different market cycles mitigates the risk moving forward. I am long BX and will continue to accumulate on dips.

Disclosure: I am/we are long BX.

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.