BlackRock Inc. (BLK)

[Pages:2]BlackRock Inc. (BLK)

Updated August 24th, 2018 by Bob Ciura

Key Metrics

Current Price: $474 Fair Value Price: $533 % Fair Value: 89% Dividend Yield: 2.7%

5 Year CAGR Estimate:

15.0%

5 Year Growth Estimate:

10.0%

5 Year Valuation Multiple Estimate: 2.3%

5 Year Price Target

$856

Volatility Percentile: 42.0% Momentum Percentile: 56.3% Valuation Percentile: 80.0% Total Return Percentile: 92.0%

Overview & Current Events

BlackRock is a large investment and asset management firm. It was founded in 1998, and today has over $6 trillion of assets under management. BlackRock provides investment management, risk management, and advisory services for institutional and retail clients worldwide. Its products include single and multi-asset class portfolios, equities, fixed income, alternative investments, and money market instruments. Approximately 82% of BlackRock's revenue is derived from investment advisory, administration fees, and securities lending, while the remainder is generated from performance fees, distribution fees, and technology services revenue.

On 7/16/18 the company announced second-quarter financial results. Revenue of $3.61 billion rose 11% and beat analyst expectations by $20 million. Adjusted earnings-per-share of $6.66 also beat estimates, by $0.11 per share. Growth was driven by $20 billion of net fund inflows, as well as higher base fees and performance fees. Adjusted earnings-per-share increased 28% from the same quarter a year ago, due to revenue growth, a lower tax rate, and $300 million of share repurchases during the quarter.

Year EPS DPS Shares

2008 $5.91 $3.12 129.9

2009 $6.11 $3.12 188.8

2010 $10.55 $4.00 191.2

2011 $12.37 $5.50 178.3

Per-Share Growth

2012 2013 2014 $13.79 $16.87 $19.29 $6.00 $6.72 $7.72 171.2 168.7 166.9

2015 $19.79 $8.72 163.5

2016 $19.04 $9.16 161.5

2017 $22.47 $10.00 160.0

2018 $27.68 $12.02 160.0

2023 $44.58 $19.36 160.0

As you can see in the above table, BlackRock has done an excellent job growing earnings-per-share over the past 10 years. This growth was due to two key factors. First, the nearly uninterrupted bull market of the past decade has fueled greater investor confidence and higher investment activity. Second, BlackRock pioneered the exchange-traded-fund revolution. Over the past several years, investors have gravitated funds toward low-cost ETFs. BlackRock operates the iShares brand, which has seen strong growth from this new trend. This has allowed BlackRock to attract new clients and strong fund inflows, at the expense of traditional, higher-priced mutual funds offered by its competitors. Through June 30th, BlackRock had net fund inflows of $276 billion in the previous 12 months.

As the company has grown earnings at a high rate, it has grown its dividend at a high rate as well. BlackRock has already raised its quarterly dividend twice in 2018. From 2018-2024, we expect 10% earnings and dividend growth each year.

Valuation Analysis

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Now 2023 Avg. P/E 31.6 28.2 17.2 14.5 13.5 16.0 16.6 17.5 18.3 18.7 17.1 19.2 Avg. Yld. 1.7% 1.8% 2.2% 3.1% 3.2% 2.5% 2.4% 2.5% 2.6% 2.4% 2.7% 2.3%

BlackRock shares currently trade for a price-to-earnings ratio of 17.1, based on expected earnings-per-share for 2018. In the past 10 years, BlackRock shares have traded for an average price-to-earnings ratio of 19.2. This seems to be a

Disclosure: This analyst has no position in the security discussed in this research report, and no plans to initiate one in the next 72 hours.

reasonable estimate of fair value for this company, as BlackRock is growing earnings at a solid rate. If the stock valuation expands to a price-to-earnings ratio of 19.2 over the next five years, annual returns would be boosted by 2.3% per year.

Safety, Quality, Competitive Advantage, & Recession Resiliency

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2023 GP/A 22.5% 2.4% 2.5% 2.7% 2.5% 2.5% 2.5% 2.7% 2.7% 3.1% 3.0% 3.0% Debt/A 37.0% 86.2% 85.2% 86.0% 87.2% 87.9% 88.5% 87.3% 86.8% 85.5% 86.0% 86.0% Int. Cov. 271.3 27.9 26.2 23.3 20.6 22.1 22.8 27.0 28.3 35.1 35.0 35.0 Payout 52.8% 51.1% 37.9% 44.5% 43.5% 39.8% 40.0% 44.1% 48.1% 44.5% 43.4% 43.4% Std. Dev. 55.0% 46.4% 32.8% 24.5% 18.8% 23.1% 16.5% 20.9% 20.3% 15.1% 15.0% 15.0%

BlackRock has a high-quality business model. Investors should not be concerned with the low gross-profit-to-asset ratio, as investment managers like BlackRock naturally high a very high level of assets. The company generates more than enough cash flow to satisfy its debt obligations and reward shareholders with dividends. The high interest coverage ratio, combined with a payout ratio below 50%, mean the current dividend is secure, with room for future increases.

The main competitive advantage for BlackRock is its industry positioning and brand strength. It is a huge asset manager, which allows it to retain clients and attract new ones. In addition, it has a leading brand in the investment management industry. Many of its investment products, such as the iShares line of ETFs, are very popular for their low fees. That said, the company would likely suffer during a recession. Typically, economic downturns are accompanied by falling equity markets, which could lead to fund outflows. Investors should expect the next recession to negatively impact BlackRock's bottom line.

Final Thoughts & Recommendation

When investors think of investing in the financial sector, bank stocks or insurance stocks typically come to mind. However, investors should not forget about investment managers. BlackRock is a high-quality company, due to its leadership position in the industry. The company is enjoying rapid growth thanks to rising markets and its popular ETF product line. We expect total annual returns of 15.0%, which earns BlackRock a buy recommendation at current prices.

Total Return Breakdown by Year

70% 60% 50% 40% 30% 20% 10%

0% -10% -20% -30%

-3.3% 2012

BlackRock, Inc. (BLK): Total Return Decomposition

56.8%

19.7%

15.7%

-2.2%

14.7%

2013

2014

2015

2016

2017

Total Return EPS Growth Dividend Return Valuation Change

15.0%

Sure Analysis Estimate

Disclosure: This analyst has no position in the security discussed in this research report, and no plans to initiate one in the next 72 hours.

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