Blackrock Is In A Rocking Position With Their Numbers

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Nov 23, 2014

The world’s largest asset management company has been riding high on its valuations and has been painting flying colors for its investors continuously. Blackrock (BLK, Financial) is riding on more than $4.3 trillion asset under management and its share have been rapidly picking up pace. Its share price appreciated by around 10% over the last month and made a new all-time high record. It is currently trading at $350 which is around 17 times projected forward earnings. Let us do a postmortem of this success run and the underlying fundamentals that is driving the asset management company to new highs.

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Facts and Figures

Let us put Blackrock through DRAG analysis to have a better understanding of the course of flight of the company. We will put the industry, competitive position, balance sheet and dividend policy will be examined to generate a 12 month price target for its shares.

In this analysis we will judge the company in the following four quartiles:

  1. How cyclical is the industry as a whole?
  2. Blackrock’s position in comparison to its competitors in the sector.
  3. The risk factor as illustrated in Blackrock's balance sheet
  4. Blackrock's dividend yield and dividend growth history

The ideal case situation would be if the company falls in a non-cyclic industry and is a market leader amongst its peer group with a low risk balance sheet and pays a good dividend on a year over year basis then the company should be trading at a handsome multiple of its earnings yield.

Quartile 1

The iShares U.S. Financial Services ETF (IYG, Financial) holds a beta parallel to that of the broad market. On a more generalized approach the non-banking companies and insurance financial services companies have a beta of 1.05 on an average. In the case of Blackrock the shares have been more volatile compared to the broader market and the volatility factor was more than 50% over that of the broader market over the last year, because strong equity markets drives asset inflows for an asset management company. Furthermore, over a period of a decade Blackrock’s EPS have demonstrated steady upward growth excepting in 2008 when the EPS went down compared to the previous year for the obvious reason of a pullback due to recession which lead to gross devaluation of assets across the world. Owing to this stability in its earning Blackrock holds an average rating despite the stocks higher beta over the last year.

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Quartile 2

Blackrock's efficiency ratios have not really been very steady over the past yet with renewed efforts in the direction there are showing considerable improvement in the area in the recent times. The company's return on investment figures have doubled since 2009 and its current operating margin is the highest reported in the last decade. Though according to current reports Blackrock is the largest asset management company across the globe yet it faces intense competition in a number of sectors. Vanguard's (VTI, Financial) low fee structure has reduced margins significantly from iShares on a number of its exchange traded funds. Even though 65% of Blackrock's assets are held by its institutional clients, yet there is steep competition in this niche domain, although Citigroup (C, Financial) analyst William Katz recently stated that he expects Blackrock to earn from fixed income side of the assets due to the unrest in PIMCO. Hence considering the above factors into the second quartile of DRAG analysis Blackrock is not generating good enough return on investment to get a high score in the competitive situation of its sector despite being the current leader. It still has a number of gaps which if not plugged can cause the company to fall behind in the competition.

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Quartile 3

Blackrock holds $9billion in long term debt outstanding however when this is equated against its $60 billion market cap it turns out to be an insignificant risk indicator. Further the company has in its kitty more than $6 million cash going by its latest balance sheet. Leverage factors have gone up in the recent times however they are yet a negligible portion of their balance sheet. Blackrock covers its interest expenses to the tune of more than 20 times in actuals and investors should be pleased with the amount of financial flexibility the corporation possesses, this allows enough room for the management to make strategic acquisitions in the future. Considering all these highlights from its balance sheet it is quite clear that the risk factor from its balance sheet is on the lower side and well below alarming levels.

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Quartile 4

Though Blackrock’s dividend yield has been in the average however its consistency has been strong year over year. Moreover its dividend payout has been significantly less than 50% of its earning which speaks loudly of the company’s ability to generate strong margins. The firm's free cash flow has been consistently higher than its net income, which has conveniently covered it dividend payout expense as well as allowed the company to buy back shares from time to time. Given the company's modest dividend payout, impressive earnings growth potential and limited capital expenditures, Blackrock comes out with flying colors from the fourth quartile due to its intrinsic strength in supporting dividend payout.

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Analyst Review

The best way to describe a portfolio holding position in Blackrock is like hitting the bulls eye of investment. To illustrate the reasons of being bullish on this company is firstly it is the market leader in its clan even in the face of stiff competition. The company boasts of a strong track record of consistent earnings growth and the streets expect it to achieve double digit EPS increases over each of the next several years. Moreover the company has displayed consistency in dividend payout over the past while managing to keep it low in comparison to its earnings. The balance sheet allows the management a considerable cash in hand to make more quality asset acquisition.

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Taking into account the above factors the current levels at which the company’s shares are trading appear to be quite attractive for a good buy in as they are about 15% undervalued and has a positive upside for both value investors and income investors. We would certainly recommend a strong buy for the global asset management leader at the current levels.