BlackRock, Inc (NYSE: BLK), the world’s largest asset manager, has performed well this year, matching the industry trend, though it faced some headwinds in recent months due to the pandemic and the trade tension between the U.S. and China. Yet, in the past 30 days, analysts have revised up their consensus earnings estimate for the current year by 3.9%. Shares of the company gained about 13% in the past six months, outperforming the 8.3% rise of the industry it belongs to.
BlackRock’s initiatives to restructure the actively-managed equity business and expand globally through acquisitions to boost the top line and assets under management (AUM) have been impressive. The upward revision of the earnings estimate indicates that analysts are optimistic about its earnings growth potential.
Strong Margins
In the third quarter ended September 30, 2020, revenues increased 18% to $4.4 billion. Net income rose to $1.36 billion or $8.87 per share from $1.12 billion or $7.15 per share in the last year’s quarter. Return on investment, as compared to the third quarter of 2019, was above 1%, whereas gross margin rose to 40.2%. The growth in institutional active net inflows to about $30 billion was broad-based across all product categories and was led by higher active fixed income flows, reflecting strong activity among insurance clients.
Competitors
BlackRock faces competition in the ETF market mainly from State Street Corporation (STT) and The Vanguard Group. Together, these three players account for more than 80% of the ETF market in the U.S. and 70% of the global market. In Europe, BlackRock dominates the market, followed by Vanguard, Deutsche AWM, and Lyxor. Meanwhile, the rivals including State Street are reducing expense ratios to gain market share.
COVID Effect on Industry
- Specialty finance — Lenders in specialty finance face a wave of delinquencies as economic conditions deteriorate. With loan-related issues increasing, several financial institutions in this sector might default.
- Private equity — Secondary fund buyers are poised for a potential upside once the pandemic eases. The virus crisis has given the start-up culture a boost across the globe, so fund buyers might consider it a safe investment as the trend is largely favoring small-scale and startup companies.
- Venture capital — Special purpose acquisition companies and direct-listings have changed the way companies go public.
- Financial institutions — The affected banks can restore profitability through smart, targeted investments in technology. During the pandemic, several banks faced credit issues and they are adopting such strategies to avoid default.
- Mergers and acquisitions—Deal flow among middle-market private equity firms got affected, but the top of the market is doing well.
Outlook
Last fall, 16 pension funds and insurers representing $4 trillion under management formed the Net Zero Asset Owners Alliance, and 33 banks with $13 trillion under management formed the Collective Commitment to Climate Action. Both groups have resolved to align their financing and investment portfolios going forward with the goal of limiting global warming to below 2°C.
A significant portion of BlackRock’s AUM is allocated to investment vehicles like exchange-traded funds that track an established index or portfolio. For context, over $6 trillion sits in these passive funds worldwide, with more and more money shifting into them each year. Meanwhile, making commitments to align the finances with the Paris Agreement within the confines of competition and real-world constraints will be a challenge.
The company is also facing liquidity issues that can result in losses in the fourth quarter. According to BlackRock, a major challenge facing investors is assessing the cybersecurity risks, because companies are wary of disclosing breaches fearing they could make them more vulnerable.
Why is BlackRock a Good Buy
BlackRock may not be the world’s most valuable company but it could be the most reliable company, the reason being the strong performance of the stock that gained multifold in the last two decades. The company had about $7.8 trillion in assets under management as of September 30, 2020, and a market capitalization of around $109 billion. The firm offers a variety of funds and portfolios, investing in vehicles such as equities, money market instruments, and fixed income. Clients look to BlackRock for access to mutual funds, exchange-traded funds and investments focused on retirement income and college savings.
BlackRock Q3 2020 Earnings Call Transcript
BlackRock’s dividend, which started at 20 cents per share in 2003, is at $3.63 per share now. The price-to-earnings ratio of 18.85 is nearly double that of big banks like JP Morgan Chase & Co. (JPM) and The Goldman Sachs Group Inc. (GS).