Just Wait for the Turn, This Will Rock!

By Chad Henage - July 31, 2012 | Tickers: BLK, BEN, LM, STT | 0 Comments

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In an equity environment like we have had the last few months, it's not surprising that a company such as BlackRock (NYSE: BLK) would have trouble increasing earnings by a tremendous amount. I've looked at multiple asset managers in the past, and found that they each have their own strengths and weaknesses. At this point, it appears that BlackRock's biggest weakness is the equity market itself. That's a good problem to have, in the sense that the company is not underperforming, as much as they're waiting for the market to turn. You can see across each division, the strength in the company's organic business. 

Retail Assets Under Management:

With reported revenues down 5%, and diluted adjusted EPS up 3%, it's hard to get a sense of the strength that BlackRock showed in the last quarter. While the company's assets under management were down 3% on a year-over-year basis, each division showed strong growth in net inflows in the last quarter. For instance, Retail Assets Under Management showed net inflows of $1.6 billion, however this was more than offset by over $15 billion lost in market declines. This total inflow was comprised of $2.9 billion in net inflows on the retail domestic side, offset by international retail outflows of $1.3 billion. Just one of BlackRock's competitors for these retail assets is Franklin Resources (NYSE: BEN). This company markets mutual funds, closed-end funds, and active managed accounts to retail investors worldwide. If you're an investor trying to choose between Franklin Resources and BlackRock, there are at least two numbers that favor BlackRock directly. The first is each company's operating margin. In the most recent quarter, BlackRock's operating margin was 37.19%, versus Franklin's operating margin of 34.48%. A second factor for investors, has to be the difference in dividend yield between the two companies. While BlackRock pays a 3.6% yield that has been raised on a consistent basis, Franklin pays just a 1% dividend. As you can see, at least in this comparison, BlackRock would seem to be the better choice.

iShares:

The category of iShares products saw total net inflows of $6.1 billion, however, keeping with the theme, over $32 billion in market declines more than wiped out this progress. As proof that the equity market has scared investors into the perceived safety of fixed income, equity outflows totaled $5.4 billion, while fixed income saw inflows of $11.7 billion.

Institutional Assets Under Management:

Since institutional investors represent more than half of the company's clientele, their choices are extremely important to BlackRock's bottom line. The company saw $5.9 billion worth of outflows in active accounts, but had equity index inflows of $6.5 billion. Interestingly, institutional investors poured money into equity index assets, and actually withdrew assets from fixed income investments. In the institutional arena, BlackRock faces multiple competitors, such as Legg Mason (NYSE: LM) and State Street (NYSE: STT). These two companies specifically benefit when the equity markets do better. Whether it's because of BlackRock's reputation for excellence, or simply better performance, the company is a more efficient operator than either competitor. For instance, BlackRock leads the way with an over 37% operating margin. Compare this number to State Street with a 28.35% margin, and Legg Mason at just 11.52%, and you can see that BlackRock is turning more revenue into income.

Financials & Assets:

Investment advisory, administration, and securities lending makes or breaks this company. This one line item represents over 89% of total revenues. A positive for shareholders is that the company has reduced its diluted share count by 5.77% in the last year. Last but not least, you could make the argument that BlackRock could be one of the best investments directly tied to the performance of the equity markets in the United States. With 60% of assets under management in the US, you can see as the U.S. market moves, BlackRock benefits or suffers.

Conclusion:

When investors choose a stock many times they will compare the expected growth rate of the competing companies. This is a category where BlackRock stands out among the competition. Only Legg Mason has a higher expected growth rate, and the challenge for that firm is the negative connotation that it picked up through the Great Recession. In addition, Legg Mason's yield of 1.7% cannot compete with BlackRock's paying 3.6%. State Street is expected to grow at just over 9%, as is Franklin Resources. With analysts calling for 12.5% growth at BlackRock and a 3.6% yield, it seems that the company represents the best combination of growth and income. As an added bonus, BlackRock's forward P/E ratio of 12.53 looks reasonable as well. If the equity market can get out of the company's way, this company's future earnings reports could truly rock!

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