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Lowering BlackRock's Fair Value on Lower AUM, Profits

Inflows remained impressive in Q1 despite market volatility.

While there was little in wide-moat-rated BlackRock's BLK first-quarter earnings that would alter our long-term view of the firm, we have lowered our fair value estimate to $930 per share from $960 after updating our valuation model to include slightly lower levels of AUM, revenue, and profitability in the near to medium term given the increased market volatility during the first couple of quarters of 2022.

BlackRock closed out the March quarter with $9.570 trillion in managed assets, down 4.4% sequentially but up 6.2% on a year-over-year basis. Net long-term inflows of $114 billion were impressive, considering the disruption in the equity and credit markets during the first quarter. The inflows were reflective of an annualized organic AUM growth rate of 4.9%, which was at the upper end of our long-term target calling for 3%-5% annual organic AUM growth. More importantly, BlackRock continues to see positive organic growth from its higher fee-earning active equity platform, which provides some offset to ongoing fee compression.

Although average AUM was up 10.1% year over year during the first quarter, BlackRock recorded only a 6.7% increase in base fee revenue growth as product mix shift led to a 3.1% decline in the firm's realization rate. Total revenue was up 6.8% when compared with the prior year's quarter, aided by higher technology and risk management revenue as well as increased distribution fees. Our full-year forecast continues to call for mid-single-digit top-line growth during 2022.

As for profitability, BlackRock posted a 240-basis-point increase in first-quarter GAAP operating margins to 37.5%. On an adjusted basis, the firm's operating margins were 44.2%. While fee compression and other industry headwinds have blunted the operating leverage inherent in the asset-management business, we still see BlackRock generating adjusted operating margins in a 44%-46% range over the next five years, compared with 44.4% on average during 2017-21.

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About the Author

Greggory Warren

Strategist
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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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