With global equity markets taking a beating last month and BlackRock (BLK) earning most of its revenue from fees on assets under management, the company is looking like an incredible long-term buy right now with shares trading near 52-week lows and at 15.6x TTM P/E adjusted for one-time benefits from U.S. tax reform. While this P/E ratio might not sound like too attractive for classic value investors, the company's growth over the past decade and further white-space ahead of it for future growth create a very favorable PEG ratio of 1.0x based on the 14.9% average annual EPS growth over the past 10 years.
An Intro to the Company
BlackRock is the largest asset manager in the world and collects revenue from administration fees, performance fees, investment advisory fees, security lending fees, distribution fees, and technology service revenues. Fees earned on assets under management [AUM] make up the majority of revenues at 80.6% for Q3 2018, but this segment has a somewhat diversified client base within it. Breaking down AUM fees, BlackRock's popular iShares ETF products made up only 39% of AUM fees in Q3 2018 with Retail and Institutional AUM making up the bulk of the rest.
Source data from Q3 2018 press release
Growth in the company is robust and highlights BlackRock's growing competitive advantage. With record $367B of inflows in FY 2017 (yes that's right, I said billions), the company continues to expand globally as retail and institutional investors flock to the company's investment products. Putting net inflows together with global market movements, BlackRock's AUM grew $1,140B (growth of 22%) over FY 2017. Growth has continued into FY 2018 with AUM up 8% year-over-year (YoY) in Q3 FY 2018. This growing asset base has (and should continue to in my opinion) helped the company achieve economies of scale in its operations on the cost side while also helping the appeal of the company's products by allowing economies of scale to be passed on to customers through lower fee products and giving greater liquidity to their iShares ETF products.
A Highly Profitable and Growing Company
BlackRock's position as the largest global asset manager with a diverse product offering has allowed the company to generate superior returns. While the company is cyclical along with the stock market due to it earning fees on AUM, operations have consistently remained profitable over the past 10 years, including the financial crisis.
Source data from Morningstar
Over the past decade, the company has achieved average return on equity [ROE] and return on invested capital [ROIC] of 10.4% and 9.0% respectively. This level of profitability is below my rule of thumb of 15% ROE but above my more important unleveraged ROIC rule of thumb of 9%. The close approximation of ROE to ROIC is an indication of the BlackRock's low financial leverage. These return figures allow me to be confident that, in my opinion, the company is able to maintain and continue to increase its intrinsic value in the future. On the growth side, book value per share has grown from $102.10 in 2007 to $199.85 in their latest quarter, which when combined with the dividends paid out from equity, has averaged growth of 11.8% annually.
Share Repurchases in the Capital Budget
Over the past decade, growth at BlackRock has been impressive with EPS growing at an average annual rate of 14.9%. However, revenue growth has been more moderate growing at an average rate of 9.9%. Part of the outsized growth in EPS has been driven by increased operational performance (as witnessed by increasing ROIC in the previously graph above) but also largely by share repurchases throughout the period.
Source data from Morningstar
The company issued shares earlier in the decade when they acquired Barclays Global Investors, giving BlackRock additional active, index and exchange-traded fund capabilities through iShares. Since 2010 however, the company has bought back an average of 2.1% of their outstanding shares each year with total shares decreasing from 193 million in 2010 to currently around 163 million today. Adding this average 2.1% annual share repurchase to the company's current 3.06% forward dividend yield could increase total shareholder yields towards 5.16%.
I always like to see share repurchases by management as it shows capital budget discipline and management's faith in the long-term prospects of the business. Share repurchases have not come from increased debt in the capital structure either as interest coverage ratios have increased in recent years or remain quite conservative at 31.9x in the TTM period.
Getting A Sense of Valuation
When looking at growth companies such as BlackRock, a good tool to use is legendary investor Peter Lynch's PEG ratio. BlackRock's reasonable 15.6x TTM P/E and outsized growth as mentioned earlier lead to PEG ratios of 1.6x for revenue growth and 1.0x for EPS growth. These figures are well below legendary investor Peter Lynch's rule of thumb of being under 2x (a PEG ratio over 2 suggests that earnings growth is already built into the price).
I also always like to examine the relationship of average ROE and price to book value. This relationship is especially important for cyclical companies and something I consider similar to Shiller's CAPE ratio but a little simpler to calculate in my opinion. It examines the average ROE over a business cycle and adjusts that ROE for the price investors is currently paying for the company's book value per share. With BlackRock earning an average ROE of 10.4% over the past decade and the shares currently trading at a price to book value of 2.1 when the price is $424.73, this would yield an adjusted ROE of 4.9% for an investor's equity at that $424.73 purchase price, if history repeats itself. While this is not above the 9% that I like to see, adding a 3% growth rate to represent the company growing alongside global GDP would increase this potential total return up to 7.9%. Also, an increase in financial leverage at the company would greatly increase ROE and future growth above this conservative 3% level.
Source data from Morningstar
BlackRock's share price decline during last month's carnage in global stock markets has set up an opportunity for investors with a long-term perspective to take a position in the growing and highly profitable company. While the company's 15.6x TTM P/E might not sound too enticing to value investors, if we factor in BlackRock's growth over the past, it yields cheap PEG ratios around 1.0x for EPS growth and for 1.6x revenue growth.
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Disclaimer: While the information and data presented in my articles are obtained from company documents and/or sources believed to be reliable, they have not been independently verified. The material is intended only as general information for your convenience and should not in any way be construed as investment advice. I advise readers to conduct their own independent research to build their own independent opinions and/or consult a qualified investment advisor before making any investment decisions. I explicitly disclaim any liability that may arise from investment decisions you make based on my articles.
Disclosure: I am/we are 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: I am long BLK with an average cost base of $412.70.