It’s perhaps fitting that the company that claims to be the world’s biggest asset manager - $4.7 trillion worth of assets - also has a lofty share price, in the $350s.
However, we investors don’t care so much about the the relative share price so much as the valuation and direction. Given that we found BlackRock, Inc. (BLK, Financial) in the Buffett Munger screener at GuruFocus, we have would expect that the company is at least fairly-valued, and has predictable earnings; that, in turn, should pull the stock price up.
BlackRock will be a familiar name to anyone who’s looked at mutual funds or iShares ETFs; it might also be a familiar name to those who’ve looked closely at the the brains behind their pension plans; and it might be a familiar name to those who checked on asset managers for the TARP (Troubled Asset Relief Program).
From an investor’s perspective, here’s the story so far: Share price (green line) and net income (blue line) since its IPO in 1998 (in billions):
History
1988: Eight partners form a company that will “...provide institutional clients with asset management services from a risk management perspective.” Initial funding for the company comes from The Blackstone Group L.P.
1992: Name change, from Blackstone Financial Management to BlackRock.
1995: BlackRock is bought by PNC Financial Services Group, while continuing to be managed independently.
1998: BlackRock takes over PNC’s equity, liquidity, and mutual fund operations.
1999: Goes public at $14 a share.
2000: Launch of BlackRock Solutions®, the risk management division of BlackRock, Inc.
2005: Acquires State Street Research.
2006: Acquires Merrill Lynch Investment Managers.
2007: Acquires Quellos Group, LLC.
2009: Acquires Barclays Global Investors, which adds active, index and exchange traded fund capabilities through iShares..
2009: U.S. Treasury contracts with BlackRock to help manage assets under the Troubled Asset Relief Program.
2011: Hired by Bank of Greece to provide analysis and advice on the Greek banking system.
History based on the company website and Wikipedia.
Comments: A relatively young company, not long past the 25th anniversary of its founding; it has grown rapidly thanks in part to earlier acquisitions. It now calls itself the world’s largest asset manager.
BlackRock’s Business
Provides investment and risk management services to institutional clients and retail investors.
According to its 10-K for 2014, major products include:
- Single- and multi-asset class portfolios investing in equities;
- Fixed income;
- Alternative investments; and
- Money market instruments.
The following chart, from the Goldman Sachs 2014 US Financial Services Conference (December 9, 2014) shows revenue by product line for the first three quarters of 2014:
Distribution channels include:
- Open-end and closed-end mutual funds;
- iShares exchange traded funds (ETFs);
- Separate accounts;
- Collective investment funds;
- Other pooled instrument vehicles.
It also offers:
- BlackRock Solutions® (BRS), an investment and risk management technology platform; Aladdin® for risk analytics; Advisory services and solutions for institutional investors.
This chart shows a breakout of revenue by client type (first three quarters of 2014):
And this one breaks out revenue by geographic regions:
Competition
In this sector of the financial industry, firms compete to manage assets (mainly investment capital) for clients, and the metric is Assets Under Management (AUM). Competition for BlackRock includes investment management firms, mutual fund organizations, insurance companies, banks, brokerage firms, and other financial facilities.
Clients choose asset management firms on the basis of investment performance records, client service, and brand recognition. BlackRock says in its 10-K for 2014 that it has historically competed mainly on its long-term investment performance track record, investment process, its risk management/analytic capabilities, and client service
Yahoo! Finance lists BlackRock’s direct competitors as Legg Mason (LM, Financial) with a market cap of $6.4 billion, State Street Corporation (STT, Financial) with a capitalization of $30.4 billion, and UBS Group AG (UBS, Financial) with a market cap of $67.1 billion. BlackRock’s capitalization is $62 billion while the Asset Management industry as a whole represents $689.5 billion in market cap.
Other
Employees: as of December 31, 2014, it had 12,200 employees, about 5,800 outside the U.S.
Facts from the company website: $4.65 trillion assets under management, 135 investment teams, managing 7,700 portfolios.
Comments: BlackRock has a diversified portfolio of business lines within the overall umbrella of investment and risk management. In addition, it is diversifying internationally, with worldwide reach and expansion. And, with nearly $5 trillion in funds, it has the heft to compete in almost any market it chooses.
Opportunities, Risks, & Growth
Opportunities (10-K, 2014)
The company says it sees opportunities in several areas, opportunities which will directly or indirectly lead to growth:
Improvement in its investment performance, and more specifically, greater alpha (returns above the risk-adjusted performance of a benchmark index) from its actively managed fund and products.
Growing its international business, key goals are 48% of employees outside the U.S. and 43% of AUM based outside the country.
Making the most of its ability to offer “...a variety of traditional and alternative investment products across the risk specturm...”
Its ability to reposition itself as needed to meet changing client needs, including the shifts to passive investing, ETFs, income and retirement funding, and risk management through index and actively managed products.
Emphasis on risk management, including further development of BlackRock Solutions®.
Improving economies in the U.S., Europe, and some other regions it serves.
Risks (10-K, 2014)
By the nature of its business, BlackRock is affected by the value of its AUM; its business model exposes it to the possibility clients will reduce their investments, shifts to the products of competitors, and rebalancing of assets into products with lower fees.
Investment performance, including beta (benchmarking the market as a whole) from passively-managed products, is a key to growing and retaining AUM; poor investment performance compared to the passive benchmarks could have negative effects on both its revenue and earnings.
Technology and operational risks, originating both outside and within the company; cyber crime from the outside, for example, while on the inside, it needs to continually develop its technology platforms to meet client needs and competitors’ products.
The company’s infrastructure is concentrated in a few major cities, including San Francisco, New York, London, and Gurgaon.
As it notes, it is “subject to extensive and pervasive regulation around the world.” Not only must it keep pace with regulatory changes in the U.S., but it must also with ever-changing regulations in all the countries it services.
22% of BLK’s capital stock belongs to one entity (as of December 31, 2014): The PNC Financial Services Group, Inc. Since PNC has committed to voting its shares as directed by the Board of Directors, this places a good deal of power in the hands of directors.
Growth
Here’s our starting point for assessing growth: Revenue (green line) and EBITDA (blue line):
This image (from the Goldman Sachs presentation) illustrates the company’s plan to grow in coming years:
To summarize that, somewhat differently:
- Grow AUM by an average of 5% a year;
- Grow revenue faster than AUM;
- Gain operating leverage by investing in the business, for economies of scale;
- Repurchase shares;
- Grow dividends;
Putting all those pieces together, BlackRock expects to increase its Earnings Per Share by at least 10% a year.
Comments: Despite operating in a crowded field, BlackRock believes it can continue to grow its EPS, and at a pace of more than 10% a year; none of the risks identified appear likely to have a material effect on this growth.
Management
Chairman and Chief Executive Officer: Laurence D. Fink, age 61, has headed the company since its founding in 1988. Previously he held senior positions at The First Boston Corporation. Barron’s has named him one of the "World's Best CEO's" for seven consecutive years.
Senior Managing Director & Chief Financial Officer: Gary Shedlin, age 50. Before joining BlackRock, Shedlin was a Vice Chairman, Investment Banking and a Managing Director in the Financial Institutions Group at Morgan Stanley.
Board of Directors: A board of 17 members, 14 of them independent. The roster includes senior figures from companies such as Swiss Re, Verizon, Kohlberg Kravis Roberts, and Barclays PLC.
ISS Governance QuickScore: Receives a rating of 7 on a scale in which 1 indicates lower governance risk and 10 indicates higher governance risk. It receives four red flags: for Board Practices, Meeting and Voting Related Issues, Termination, and Audit and Accounting Controversies. It receives one green star, for Other Issues.
Management information from the company website and Reuters.com.
Comments: A seasoned executive team combined with a well-connected board; they should be able to deliver on the company's growth plans.
Ownership
As we’ve noted in the History and Managment sections, BlackRock was spun out of PNC Financial, and the latter still holds 22% of BLK’s shares.
Gurus: Seven gurus followed by GuruFocus hold stock in BLK: Ken Fisher (Trades, Portfolio), Ken Heebner (Trades, Portfolio), Jim Simons (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), George Soros (Trades, Portfolio), and Meridian Funds (Trades, Portfolio). The biggest holding is that of Tom Gayner (Trades, Portfolio), with 116,000 shares.
Institutions: nasdaq.com puts the institutional total, as of December 31, 2014, at just under 81%:
Short Interests: GuruFocus puts the short interests at 1.19%, and in this chart shows the historical context:
Insiders: Turning to people employed by or otherwise connected to BlackRock, GuruFocus shows insider ownership at 4%. Yahoo! Finance’s Insider Roster shows founder/CEO/Chairman Fink with the largest holding, 1.25 million shares as of February 9, 2015. Three other insiders hold more than a quarter million shares each.
Comments: For retail investors concerned with minority rights issues, BlackRock may not be the place to invest; one company (PNC, Financial) has a substantial holding which is controlled by the board. More comforting for retail investors will be the number of shares held by institutions and insiders, as well as the low short interest.
BLK by the Numbers
Comments: Capitalization of more than $60 billion; the current share price is about 2% below its 52-week high; it has a reasonable and sustainable dividend; and it bought back just under 1% of its own shares last year.
Financial Strength
The automated system behind GuruFocus’ ratings gives BlackRock a weak 4/10 for Financial Strength and a 9/10 for Profitability & Growth:
GuruFocus reports that the Financial Strength ratio reflects three key measures:
- Its debt burden, as measured through Interest Coverage for the current year
- The debt to revenue ratio (lower is better)
- The Altman Z-Score
To examine these issues, let’s start with an historical look at BlackRock’s Interest Coverage
As we can see, BLK had a coverage ratio of more than 19 times, which may be a good result but less than it was between 2005 and 2008, and that likely accounts for the red flag. So, we will take the Interest Coverage warning with a grain of salt.
Next, let’s look at revenue (green line) and debt (blue line) in historical context:
This chart indicates debt has been roughly growing in lockstep with revenue, and so again, we have no outstanding concerns.
The Altman Z-Score was designed to give investors a quantitative sense of the likelihood that a company might end up in distress, or even in bankruptcy. However, as the explanatory page at GuruFocus notes, it is designed for industrial companies. That’s underlined by the following GuruFocus chart, which shows BLK’s Z-Score to be in line with its Asset Management peers: http://www.gurufocus.com/stock/BLK
Turning to free cash flow, the following chart illustrates its growth over the company’s publicly-traded history; the green line shows us annual cash flow, while the blue line shows the growth trendline (averaging almost 8.5% a year over the past five years):
Comments: There are several reasons to believe that BlackRock’s financial strength should score higher than the rating it receives from the GuruFocus automated system. The company has more than enough cash to make its interest payments; revenue and debt have grown together; the Z-Score is really not applicable for this financial firm; and free cash flow, overall, has been on a strong upward trend.
Valuation
At the close of trading on March 10, 2015 BlackRock had a PEG ratio of 1.04 putting it at the low end of the fair-value range (a ratio of less than 1.0 means under-valued, 1.0 to 2.0 means fair-valued, and anything more than 2.0 means over-valued).
On the strength of that valuation and its 4 (out of 5) Star predictability BLK earns a place on the Buffett Munger screener at GuruFocus.
4-Star predictability means it is one of the best performers among all publicly-traded companies, consistently generating strong earnings for at least five years. Stocks with higher predictability generally enjoy better share price growth, and are less likely to experience losses.
The PEG ratio, or the PEPG as its also known, is derived by dividing the familiar P/E ratio by the average of earnings growth over the past five years. Unlike the P/E, we can generally use the PEG ratio across industries; PEG puts Price into perspective by connecting it to five years of earnings growth.
This GuruFocus chart shows how the PEG ratio has varied since 1998:
For medium-term investors, this chart might also suggest a strategy: Buy when the PEG is below the trendline (the blue line) and sell when it’s above the trendline. Hardly the most sophisticated strategy, but it does offer one more arrow for our quivers.
This Peter Lynch chart (the blue line shows a ‘normalized’ P/E of 15, which is compared with price on the green line), gets at the price and earnings dynamic from a slightly different perspective. This chart also suggests the company is fairly valued at this time:
Comments: Both the PEG ratio and the Peter Lynch chart suggest BlackRock is fairly-valued at its current price, and just as importantly, we can say it is fairly valued in light of its earning power. We can also venture that the PEG ratio gives us a quantative basis on which to compare BLK with all or most publicly-traded stocks.
Conclusions
Although BlackRock, Inc. Is one of the costliest stocks on the market, it is also fairly valued.
In addition, it has a good history of generating earnings growth, and management has plans to continue along that path.
BLK also provides a reasonable dividend for for long-term investors who like to earn income while they wait for their capital appreciation.
