BlackRock Inc.: The Largest Player In The Market

| About: BlackRock, Inc. (BLK)

Summary

The assets under management (AUM) were flat for 2015.

The AUM will fall in 2016 due to the market downturn and unfavourable exchange rate. New funds inflows will not offset this impact.

Meaningful EPS growth is only foreseen from 2017 and will continue in 2018.

Current stock price is attractive for the long-term investors.

On 15 January 2016, BlackRock Inc. (NYSE:BLK) reported the full year 2015. In the article that I've wrote on 9 December 2015, my conclusion was that the stock price of BLK was above lever that I would like to pay. On that day, the stock was traded at $344, while now it is traded at $290-$299.

Following the market fall down in January and the publication of the results for 2015 and the review of estimates for the years 2016-2018, I would like to reassess my conclusion on whether BLK is worth investing in.

BlackRock Inc. is one of the biggest assets managers in the world. BLK provide services in investment management, risk management and advisory services for institutional and retail clients worldwide. BLK offers products directly or through intermediaries in a variety of vehicles, including open-end and closed-end mutual funds, iShares ETFs, separate accounts, collective investment funds and other pooled investment vehicles. BlackRock Solutions provides services under its proprietary risk and investment management platform called Aladdin.

As of December 31, 2015, BLK has $4.645 trillion in assets under management, shy below the $4.652 trillion of assets under management that were reported at the end 2014. Looking from current volatile and still declining market perspective, it is clear that AUM had declined, and this decline will be only reported in the 1st quarter of 2016. The consequence of the decline in AUM is less revenue for BLK from assets management fees.

For most retail investors, the name is associated with the iShares ETFs. Indeed, BLK is the biggest ETF provider (sponsors) with regards to assets under management ($1.092 trillion as of December 31, 2015). However, the iShares ETFs represent only 22.5% of the total assets under management. In the reporting, BLK splits its clients into three categories: Retail ($540 billion), iShares ETFs ($1.092 trillion) and Institutional ($2.702 trillion). In addition to that, there is about $300 billion under cash management category and $10 billion under Advisory category. Thus, BLK is more the fund manager for the institutional investors rather than ETFs.

The revenue in 2015 reached $11.401 billion (just above the expectation of $11.35 billion) with an operating margin of 41%. The biggest sources of income are investment advisory, administration fees and securities lending revenue (approximately 86% of total revenue) followed by BlackRock Solutions and advisory fees (5.7%) and investment advisory performance fees (5.4%).

Stock performance

Analyzing the stock performance since 2011, it should be noted that the stock price grew steadily from $201.73 on 27 January 2011 to $299.26 on 26 January 2016 at the compounded growth rate of 8.2%.

BLK was not immune to the current market volatility and lost 12.1% from the closing price on December 31, 2015.

The stock's attractiveness is evaluated using a simple method. The estimates for three future years are taken and then multiplied by the P/E ratio for the stock that it is believed to be in the market for the particular stock in question. To simplify the calculations, the P/E ratios of the past five years are used: the minimum and the average of the past five years and compared with the average for the industry. Only if the estimated stock price implies the 15% annual return, the stock is considered for an investment.

According to the FactSet database, the estimated EPS for 2015-2018 as follows:

2015

2016

2017

2018

EPS estimate

19,6

20,1

22,87

26,15

EPS growth rate

3%

14%

14%

Stock price using min P/E of 5 years (11.2x)

219,52

225,12

256,14

292,88

Stock price using average P/E of 5 years (17.2x)

337,12

345,72

393,36

449,78

Implied annual return

15,60%

15,10%

14,60%

Click to enlarge

Conclusion

It is clear that BLK's size and expertise will allow it to create new products that ETF investors and institutional investors need and want. The institutional investors still might prefer the biggest player in the market as the first choice for the passive and active strategies. Consequently, that will allow BLK to keep current customers and to attract new ones. However, the growth rate of the assets under management is far from sure as witnessed in 2015 where assets under management are still below the previous year level. About the ETFs, it is still to be seen what market share BLK will manage to grab from that expected doubling of the market. For BLK, that would mean increasing the ETFs assets under management from $1 trillion to $2 trillion in four years (total assets from $4.645 trillion to $5.645 trillion if other assets stay constant). And ETFs are less than the quarter of the total assets under management for BLK.

I expect that the AUM will fall in 2016 due to the current market downturn, the impact of the exchange rates for the non-dollar investments and new funds inflows will not offset this. The situation might gradually change in 2017 and 2018. That is also reflected in the estimates for 2016 with EPS growth rate of 3%.

As the valuation stands now, BLK share price being around $299 is at the right level required to fulfill the investment objectives, especially if looking to the long-term goals and disregarding the short-term volatility and noise.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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