In this article, we'll take a look at BlackRock (BLK) and American Express (AXP), two financial services firms. Both firms recently released third-quarter earnings and we're going to examine the third quarter and update the investment recommendations.
BlackRock Inc reported third-quarter profit that rose 8 percent. Third-quarter revenue increased 4 percent compared with a year earlier to $2.3 billion. Performance fees jumped 12 percent to $103 million. Revenue from risk management advice and other services at the BlackRock Solutions unit rose 9 percent to $128 million. BlackRock's adjusted profit margin hit 40.7 percent.
Investors withdrew $43 billion from BlackRock's long-term funds and accounts. The firm lost $36 billion from a similar one-client move in the first quarter. BlackRock also saw institutional customers withdraw $2.9 billion from its higher-fee alternative investments and $5 billion from actively managed stocks. Total assets under management at BlackRock hit $3.67 trillion, up 3 percent during the quarter and up 10 percent from a year ago.
On Monday, BlackRock unveiled a plan to cut fees on six iShares funds and introduce four new low-cost funds. The fee reduction could reduce BlackRock's annual revenue by $35 million to $40 million. However, growth produced by the new ETFs could overtake the losses. The fee reduction estimate and growth projections are from BlackRock President Robert Kapito.
The shares are underperforming the S&P 500 year-to-date. BlackRock repurchased 960,100 shares in the quarter, brining the total to 8.2 million shares this year.
In September, BlackRock closed the deal to acquire Swiss Re. The acquisition was announced in July. With the completion of this deal, Swiss Re's investments in SRPEP have been diverted to BlackRock Alternative Investors. The acquisition merged SRPEP into BlackRock Private Equity Partners.
American Express Co.'s net income rose 1.2 percent to $1.25 billion from $1.24 billion a year earlier. A 6 percent increase in worldwide customer spending from the same period in 2011 represented slower growth. Total revenue climbed 3.8 percent to $7.86 billion. Expenses fell 2 percent to $5.5 billion from a year earlier.
AmEx is entering the prepaid debit card market partnering with Wal-Mart Stores Inc. (WMT) at more than 4,000 locations across the U.S. and online. The move comes as U.S. card income fell 4.6 percent and international card income slid 26 percent.
The lender said it set aside $479 million to cover future loan losses, a 92 percent increase from the same period a year earlier. Write-offs for loans AmEX deems uncollectible declined to 1.9 percent in September. Loans at least 30 days overdue climbed to 1.3 percent from 1.2 percent. Loans to customers who carry card balances climbed 6 percent to $61.8 billion.
American Express accounted for 25 percent of $2.05 trillion in U.S. credit-card spending last year and almost a third of the industry's $179.9 billion increase from 2010, according to the Nilson Report.
Since 2009, revenue increased every year. Revenue in 2011 was above the 2008 level of $22.6 billion. Revenue this year is on pace to increase compared with 2011. Net income is also on pace to increase compared with last year. I'm not sure revenue or net income will increase in 2013. The firm may face some macro-economic headwinds.
Privately owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 894,000. This is 11.6 percent above the August rate and 45.1 percent above the September 2011 rate.
We have seen a substantial increase in building permits, housing starts and housing completions compared with a year ago. It is a sign of a healthy, expanding economy, however, caution is warranted as building permits, housing starts and housing completions may decline.
China's industrial production, retail sales and fixed-asset investment accelerated in September. Gross domestic product expanded 7.4 percent in the third quarter from a year earlier; that compares with a reported 7.6 percent expansion in the second quarter. China's economy expanded at 9.1 percent in the third quarter of 2011.
The market perception may be that the report delays the need for the PBOC to add stimulus to support the economy. Sunday night, the inflation report stated China's rate of consumer price increase is 1.9 percent. Producer prices are declining. That being what it is, I believe there is a need for the PBOC to add stimulus to prevent deflation. The PBOC may add stimulus before the end of the year. Both BlackRock and AmEx would benefit from a cut in the benchmarket interest rate or reserve requirement.
Spain's Banks Unlikely to Need Capital
There is some doubt surrounding the capital adequacy of Spanish banks. The issue stems from the worst-case economic growth scenario in the stress test. The problem is the stress test's worst-case scenario for economic growth is the likely scenario at this point. That said, should the economic outlook worsen in Spain, the nation's lenders may require additional capital to cover loan losses. Personally, I think the 100 billion euros should be enough to cover loan losses. My assumption is based on the 58.3 billion euros needed in the worst-case scenario and the 100 billion euro bank bailout request from the Spanish government.
BlackRock is a well-run company: management is top notch. The financial performance and position are excellent. From a valuation perspective, the firm is fairly valued. Long-equity holders should maintain long positions. I would recommend adding to positions on economic uncertainty.
American Express is a blue-chip company. The financial performance and position is superb. The short-term valuations may be a bit extended. Long-equity holders should lighten up on position and increase positions on economic uncertainty.
The housing data may be reaching a short-term peak and the economic data coming out of China points to a continued economic slowdown. There continues to be uncertainty surrounding the European sovereign debt crisis. I would and will use the eventual economic weakness to add to positions.
Further, there may be some mis-understanding regarding BlackRock's business model. ETFs may end up being a highly regarded substitute for mutual funds and the declining fees add to the attractiveness of ETFs. In other words, Wall Street is viewing declining ETF fees as a negative value-relevant fundamental factor and it is a positive.
Disclosure: I am short SPY. 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.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.