Is BlackRock stock a buy or a sell?


BlackRock’s BLK third quarter results were worse than expected, due to weaker flows and larger foreign exchange and market losses than we had expected. Given this, along with expected lower equity and credit market returns in the near term, we lowered our fair value estimate to $760 per share from $850. Even so, BlackRock continues to be our top pick among the traditional US-based asset managers we cover, with stocks trading well below our fair value estimate.

BlackRock ended September with $7.961 trillion in assets under management, down 20.5% year-to-date. Net inflows of $247.6 billion since the start of 2022 were impressive, given the disruption in equity and credit markets, and reflected an annualized organic growth rate of 3.3% for assets under management. While this is at the lower end of our long-term goal of 3% to 5% annual growth, the company still has 55% of AIG Corebridge’s $150 billion mission to fund in the short term, we we therefore expect BlackRock to report annual organic growth in assets under management closer to 4% for 2022.

We forecast average annual organic growth in assets under management of 4.1% over the period 2022-26, with assets under management broadly not returning to 2021 levels before the end of our five-year outlook. With fee compression expected to be less of a problem for BlackRock than for most traditional asset managers, this should translate to a 1.1% compound annual growth rate in revenue over the 2022-26 period. We expect relative stability in operating profitability over the next five years, primarily due to the scalability of passively managed exchange-traded fund operations. For 2022-26, we expect the business to generate adjusted operating margins of 42% to 44%.

For much of the past decade, we’ve lamented the fortunes of many traditional U.S.-based asset managers, noting that their top line and earnings are under pressure from significant secular headwinds (aging baby boomers and the growth of passive investing) and cyclical headwinds. (mostly from a descending bull market for stocks). We believed that global regulatory changes aimed at increasing fee and performance transparency, as well as pushing for a greater degree of fiduciary responsibility in retail advisory relationships, would increase hurdles for U.S. asset managers. more traditional than we cover.

With retail intermediary platform gatekeepers also focusing much more on fees and performance when deciding which products to place on their platforms, the industry is ripe for fee and margin compression; active asset managers are expected to not only reduce the gap between the management fees charged for their funds and the fees attached to index products, but to spend more to improve investment performance and improve the distribution of returns. products.

What sets BlackRock apart

Unlike most of its peers, BlackRock has been able to offset many of the age-old headwinds faced by traditional asset managers with a few headwinds of its own. The biggest differentiators for BlackRock, in our view, are scale (especially in passive investing), ability to offer passive and active products, greater focus on institutional investors, strong brands and more reasonable fees.

BlackRock is basically a passive investment store. Through its iShares ETF platform and institutional index fund offerings, the company derives two-thirds of its assets under management (and nearly half of its annual revenue) from passive products. In an environment where retail and institutional clients are expected to seek passive product providers, as well as larger scale active asset managers, established brands, strong long-term performance and reasonable fees , we think BlackRock is well positioned . Product diversity and a stronger focus in the institutional channel have traditionally provided BlackRock with a much more stable set of assets than its peers, which has also led to more stable revenue and net income growth.

And unlike most of its competitors, BlackRock has generated positive organic AUM growth with its active and passive operations. Its well-diversified product range has generally made it immune to changes in asset classes and investment strategies, limiting the impact that market fluctuations or pullbacks from individual asset classes or investment styles may have on the assets under management. Although this year was different, as equity and credit markets sold off in response to rising interest rates and concerns about a near-term recession, BlackRock generated positive flows for its assets under long-term management over the three quarters.

BlackRock is the largest asset manager in the world and its product range is quite diverse. Passive strategies account for approximately two-thirds of BlackRock’s long-term assets under management, with the iShares ETF platform maintaining leading market share both domestically and internationally.

BlackRock remains our top choice among the traditional US listed asset managers we cover. Despite the headwinds of the recent equity and credit market downturn, we believe that over the next five years, a steadily expanding ETF market, improving company active fund operations, continued adoption of ESG analysis and investing, the company’s expansion of its multi-asset and alternatives platforms, and its continued technology efforts will drive the asset manager’s growth.

The market tends to reward organic growth in assets under management and operating profits above the average for US-based asset managers, which is why BlackRock is currently trading at a significant premium to the group. of nine traditional US-based asset managers we cover. However, the stocks are still significantly undervalued relative to our estimate of fair value.

Morningstar Key Indicators for BlackRock

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