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BlackRock: The Champion Asset Manager

August 18, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at BlackRock, Inc. (BLK), a $52.3 billion market cap company, which is one of the leading investment management companies in the world and is the largest asset manager in the U.S. Let's explore some reasons more closely to see if they are valid enough to invest in this stock.

The king

BlackRock has $4.6 trillion in total assets under management, which make it the largest asset manager in the world. The company has generated cash with its fixed-income operations, as many clients are projecting a rise in the interest rate. Both elements provide an advantage over its peers and give a longer-term growth potential in all the markets it has operations.

Key drivers

The well-diversified portfolio of products, with strong focus on the institutional channel, provides the firm with a much stickier set of assets than the rest of the industry. Compared to its peers, it has a unique size and scale of its operations, as well as huge strength of its brands, diversity of its AUM by asset class and effective distribution channel.

iShares

BlackRock is the leader provider of Exchange-traded funds, which are the main drivers for growth. It generated $65.3 billion during 2013, and it is probable it will exceed that level this year.

Platforms

Reviewing the firm's product mix, a greater development of its fixed-income platform would be great, even though there are several players well established. Its equity platform also needs to be developed to keep on track, which faces fierce competition, too. The actively managed fixed-income and equity platforms will generate higher fees than its passive operations.

Revenues, margins and profitability

Looking at profitability, the revenue growth by 11.92% has led a good growth in earnings per share, which increased in the most recent quarter compared to the same quarter a year ago by 12.6% ($4.72 vs $4.19). During the past fiscal year, the company increased its bottom line by earning $16.88 versus $13.80 in the prior year. This year, Wall Street expects an improvement in earnings ($19.22 versus $16.88).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

BEN

Franklin Resources

21.35

STT

State Street

10.48

BLK

BlackRock

11.08

CIXPF

CaixaBank S.A.

2.07

 

Industry Median

8.25

The company has a current ROE of 11.08% which is higher than the one exhibit by its peers State Street (STT) and CaixaBank S.A. (CIXPF). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, Franklin Resources (BEN) could be an attractive option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1408369893030.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 17.3x, trading at a discount compared to an average of 20.5x for the industry. To use another metric, its price-to-book ratio of 1.9x indicates a premium versus the industry average of 1.07x while the price-to-sales ratio of 5.08x is below the industry average of 7.52x. Two ratios indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,163, which represents a 12.7% compound annual growth rate (CAGR).

1408369824640.png

Final comment

The U.S. Capital Market is mature, competitive and subject to intense competition. This sector consists of 10,000 companies with annual revenue of $15 billion and assets under management (AUM) in excess of $13 trillion.

BlackRock is the principal U.S.-based asset manager with a very well-diversified product mix. Apart from all the reasons we have already analyzed, valuation is another key reason to consider BlackRock as an investment. So in this opportunity, I would recommend fundamental investors consider this Zacks Rank #3 (Hold) for their long-term portfolios.

Hedge fund gurus like Ken Fisher (Trades, Portfolio), Mario Gabellli and Tom Gayner (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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