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Equity Analyst specialized in financial services equities.
  • BlackRock - steadying equity markets could produce solid upside 0 comments
    Sep 23, 2011 5:56 AM | about stocks: BLK, BEN, TROW, JPM, WFC, IVZ

    BlackRock (NYSE:BLK) reports 3Q-11 earnings this week (Oct. 19th). The stock has been beaten down since the end of 2Q-11, falling -18.7%. This decline has been roughly on par withe the decline in the XLF (-17.9%) and far more severe than the SPY (-11.2%). The stock at 155.9 is trading on 13x 2011e and 11.8x 2012e, multiples that are roughly comparable to the asset-managers sub sector as well as the S&P 500 (i.e. 1224 is roughly 12x a $102 estimate for 2012e.....though this estimate is considered +20-30% optimistic by recession forecasters).

    The BLK P/E rating is on EPS estimates that have been shaved by c,-10% in the past 90days, so its safe to say that the street has attempted to factor in the effects of the 3Q-11 stock market tumble on BLK's fee revenues.

    During September 2011, BLK traded down to lows seen during the past couple of years.Using a P/E on trailing EPS (to stay away from moving targets on estimates), the recent lows in the $140 range rated the stock on a <13x trailing P/E. The last few years have seen ranges where the trailing P/E got as low as 11.6x

    • BLK lows in 2010 138.4 = 18.9x P/E (2009 Adj EPS 7.32) / High 243.8 = 33.3x P/E
    • BLK lows in 2009 88.91 = 13.6x P/E (2008 Adj EPS 6.52) / High 241.66 = 37.1x P/E
    • BLK lows in 2008 94.78 = 11.6x P/E (2007 Adj EPS 8.15) / High 249.37 = 41.8x P/E.

    If the stock market is telling us that BLK estimates will come down further, then playing the waiting game:
    BLK’s 2011 EPS likely to be ahead of 2010 despite market correction so far: BLK adj EPS grew solidly in 1H-11 (+25% YOY to $5.96, AuM +16% YOY) setting up 2H-11 earnings to weather some market weakness before 2011/10 growth is at risk. However, the current 2011e EPS 11.99 (+10% growth) appears to factor < +5% growth in 2H-11/11; this is likely to be downgraded after 3Q-11 EPS (performance fee related earnings are skewed to the 4th quarter and can be a key swing factor). BLK’s 2012e EPS estimates (EPS 13.17; cut by more than 10% in last 90 days) have borne more of the brunt of the market correction in 3Q-11.

    BLK’s financial performance includes typical qualities of a well-run asset management franchise operating at scale: 

    • Solid pre-tax profit margins – BLK 1H-11 adjusted margins were 39%, and there’s room for upside longer-term with positive operating leverage available on the non-compensation costs side (non-comp costs = 28% of revenues in 1H-11, down from 37% in 2007). Granted, it’s likely that street estimates account for this as the BLK CEO has publicly stated the goal of 40% margins.
    • Diverse management fees profile: 1H-11 revenues mix was 56% equities, 20% fixed income, 24% from multi-asset class/ alternatives/cash management products. 

    Fundamental story – where does the future lie for BLK?

    • Non-USA remains a future growth opportunity – BLK’s revenues mix remains quite tilted towards the USA (current mix is 68% Americas, 27% Europe, 6% Asia-Pac = quite low), so there is room to grow.
    • i-Shares ETFs expected to grow faster than overall mutual fund industry– the ETF industry’s above average  growth remains a secular trend to watch (www.ici.org has some helpful industry factbooks). BLK’s i-shares franchise is leading market player alongside the SPDR ETFs (at STT) and the Powershares ETFs (at IVZ). I-Shares is one of BLK’s best growth engines: contributes 17% of BLK's AUM ($611B/$3.65TR) and 24% of revenues ($1.1B/$4.6B 1H-11) and is growing at a faster pace than the rest of BLK's business.
    • Multi-Asset class products have robust growth: BLK’s Multi-Asset Class funds are contributing strong growth alongside the i-shares franchise. Some of the key trends we can see in BLK’s Multi-Asset Funds in 1H-11 include: grew AUM +56% YOY and revenues +31% YOY and represents 10% of overall BLK revenue base. These products appear to earn higher fee-margins than the overall average at BLK (i.e. fees/AUM of 0.40% range vs. BLK’s overall 0.20-0.25% clip).

    Looks like an entry in the $140-160 zone could get to 20-30% upside:A steadying of equity markets could see BLK set up for a rebound in its P/E multiple to the mid-teens (somewhere in mid range of P/Es seen in 2009-2010). Assuming about $13.00 of run-rate EPS after absorbing the market correction and staging a bit of a bounce, then a fair value range of $180-210 per share would be in a 14x-16x P/E range, depending on equity markets finding some footing. The upside range is using P/E multiples comparable to where the S&P could trade, however historic P/E ranges above show that when BLK rips to the upside, its P/E can expand to levels well above the 14x-16x range. A buy zone of $140-$160 can produce +20-30% upside into the $180-$210 upside range.

    Notable Risks:

    • Equities market sensitivity of revenues and earnings: This is a general asset manager stock risk that applies to BLK’s revenues mix (56% equities management fees). Worth noting that in the 2009-08 bear market, BLK’s Equity Funds AUM fell -38% YoY in 1Q-09 (this was in line with the depreciation in the SPY of -38% during the same period).
    • ETFs are not without headline risks: The Financial Stability Board (FSB) has warned of potential financial stability issues arising from recent trends in ETFs, in particular the growth of synthetic ETFs that use OTC derivatives. Although BLK’s ETF product line up is more focused on “physical ETFs” than on synthetic ETFs this is an issue/controversy that can be typical of a “growth” story where there is a “fluid situation” that requires careful attention. The recent news about the UBS rogue trader (Delta-1 hedging of synthetic ETFs) is a case in point.
    • Hedge Fund performance fees are lumpy and skew to the 4th quarter: Performance fees contributed 6.3% of BLK’s revenues in 2010, up from 4.3% in 2009 and 3.5% in 2008. August 2011 was cited as one of the weakest performances ever for the hedge fund industry, this is an area capable of producing an earnings “miss” for the street.
    • The Usual Macro Risks....since its a Financial Services Stock – a stock like this is market sensitive, so you simply cannot ignore the plethora of macro risks sitting atop equity markets: global economic growth concerns, debt sustainability concerns in USA and Europe, Eurozone existential crisis etc. etc.

    DPS yield can provide support if bear market is not too prolonged and severe  At $155.9 BLK is yielding 3.5% ($5.5ps), a decent yield compared to the asset management peers where the only stocks yielding near 3% are IVZ and EV (AB is structured as an LP and has a high yield); BLK's yield also compares nicely to traditional yield stocks like banks where the big cap choices for a yield in the 2-3% range are JPM, WFC and USB.

    Sources: Company reports, Capital IQ data on yahoo finance, proprietary work



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Themes: Financials, ETFs, BlackRock Stocks: BLK, BEN, TROW, JPM, WFC, IVZ
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