Inflows and Market Gains Lift BlackRock's Q3

While there was little in wide-moat BlackRock's (BLK) third-quarter earnings to alter our long-term view of the firm, we plan to increase our fair value estimate to $620 per share from $560 to account for the continued recovery in the equity, credit, and currency markets following the steep coronavirus-induced sell-off in the first quarter of 2020. BlackRock closed out the September quarter with a record $7.808 trillion in managed assets, up 6.7% (12.1%) sequentially (year-over-year), with organic growth, market gains and favorable currency exchange all adding to the improvement in overall assets under management.

Net long-term inflows of $97.6 billion during the third quarter were better than the positive $54.2 billion quarterly run rate we'd seen from BlackRock during the prior eight calendar quarters, as well as our own expectations for $62.6 billion. While iShares continues to be a big driver of BlackRock's organic growth (generating $41.3 billion in inflows during the third quarter), flows into actively managed products outstripped the firm's ETF business during the September quarter, generating $47.1 billion in positive flows. The company's 5.8% annualized organic growth rate for its long-term AUM during the third quarter should lift full-year results (with our updated forecast calling for a 3.5% rate of organic growth during 2020).

Average long-term AUM growth of positive 10.0% year over year during the third quarter translated into an 8.2% increase in base fee revenue growth, with product mix shift leading to a 2.8% decline in the firm's realization rate. Total revenue was up 8.2% when compared with the prior year's quarter, and increased 6.4% on a year-to-date basis (comfortably above our previous full-year forecast). As for profitability, BlackRock posted a 20-basis-point decline in adjusted operating margins to 37.4% on a year-to-date basis (in line with our previous full-year forecast).