Company Reports

While there was little in BlackRock's first-quarter earnings that would alter our long-term view of the firm, we expect to increase our $830 per-share fair value estimate slightly to account for revised near-term expectations for assets under management, revenue, and profitability since our last update. While the company's shares trade at a hefty premium relative to the other traditional asset managers (which we believe is warranted), they are trading at a nearly 10% discount to our expected fair value estimate.

For much of the past decade, we've bemoaned the fortunes of the traditional US-based asset managers, noting that they would face significant secular headwinds (from aging baby boomers to the growth of passive investing) and cyclical headwinds (leading to more-volatile equity and credit markets) that would pressure their top and bottom lines. Our thesis for the group has expected regulatory changes around the globe aimed at increasing transparency around fees and performance, as well as pushing for a greater degree of fiduciary responsibility in retail-advised relationships, to raise the hurdles for the more traditional US-based asset managers we cover. With the gatekeepers for retail intermediary platforms also becoming much more focused on fees and performance when deciding what products to place on their platforms, the industry will face fee and margin compression as active asset managers are expected to not only narrow the spread between the management fees charged for their funds and the fees attached to index-based products but spend more heavily to improve investment performance and enhance product distribution.

All the US-based asset managers we cover have reported their December-quarter earnings, and in some cases revealed assets under management, or AUM, data for January 2024. We now have a better sense of how recent market activity has been affecting results. In our third-quarter earnings wrap, we had assumed that the malaise that had crept into the markets during August-October 2023 might continue through the rest of the year.

We've increased our fair value estimate for wide-moat-rated BlackRock to $830 per share from $710 to account for revised near-term expectations for assets under management, revenue, and profitability since our last update. With the US equity markets rising 12% in the fourth quarter of 2023 and the credit markets rising 7%, BlackRock reported a 10% increase in AUM during the period. This left the firm in a better position than we had expected coming into 2024, allowing us to raise our fair value estimate by 17%.

For much of the past decade, we've bemoaned the fortunes of the traditional US-based asset managers, noting that they would face significant secular headwinds (from aging baby boomers to the growth of passive investing) and cyclical headwinds (leading to more-volatile equity and credit markets) that would pressure their top and bottom lines. Our thesis for the group has expected regulatory changes around the globe aimed at increasing transparency around fees and performance, as well as pushing for a greater degree of fiduciary responsibility in retail-advised relationships, to raise the hurdles for the more traditional US-based asset managers we cover. With the gatekeepers for retail intermediary platforms also becoming much more focused on fees and performance when deciding what products to place on their platforms, the industry will face fee and margin compression as active asset managers are expected to not only narrow the spread between the management fees charged for their funds and the fees attached to index-based products but spend more heavily to improve investment performance and enhance product distribution.

There was little in wide-moat-rated BlackRock's fourth-quarter earnings that would alter our long-term view of the firm. Even so, we expect to increase our $710 per share fair value estimate by at least 10% to account for not only a higher level of assets under management, or AUM, but the firm's announced acquisition of the $100 billion alternative asset manager, Global Infrastructure Partners. Even with the expected upward revision in our fair value estimate, we view the shares as being fairly valued.

While the runup in the equity markets the past several weeks is likely to have a positive impact on assets under management for the U.S.-based asset managers, we don't expect it to have too significant an impact on our fair value estimates, which are based on 10-year forecasts for AUM growth, fee rates, revenue, and profitability. As of the Nov. 29 market close, the traditional U.S.-based asset managers we cover were trading at an average price/fair value multiple of 0.97, making them only slightly undervalued, while the alternative-asset managers we cover were trading at an average price/fair value multiple of 1.09. This is far from the margin of safety we would need to recommend these more volatile names to long-term investors.

With all the U.S.-based asset managers we cover having reported quarterly earnings, and in some cases revealing assets under management data for October, we have a better sense of how the ongoing equity and credit market volatility is affecting results. Due to their lack of organic AUM growth—a product of having large exposure to higher-cost, poorer-performing active equity products in a market where low-cost passive products are preferred—most of the traditional U.S.-based asset managers have become dependent on equity market gains to expand their AUM. In an environment where fees are under pressure and profit margins are being affected by a need to spend more to maintain (if not improve) performance and enhance distribution, a precipitous decline in managed assets, like we saw during 2022, has a large negative impact on revenue and profitability, given the amount of operating leverage inherent in the asset manager business model.

For much of the past decade, we've bemoaned the fortunes of the traditional U.S.-based asset managers, noting that they would face significant secular headwinds (from aging baby boomers to the growth of passive investing) and cyclical headwinds (primarily from a waning bull market for equities that finally ended last year), which would pressure their top and bottom lines. Our thesis for the group has expected regulatory changes around the globe aimed at increasing transparency around fees and performance, as well as pushing for a greater degree of fiduciary responsibility in retail-advised relationships, to raise the hurdles for the more traditional U.S.-based asset managers we cover. With the gatekeepers for retail intermediary platforms also becoming much more focused on fees and performance when deciding what products to place on their platforms, the industry will face fee and margin compression as active asset managers are expected to not only narrow the spread between the management fees charged for their funds and the fees attached to index-based products but spend more heavily to improve investment performance and enhance product distribution.

While there was little in wide-moat-rated BlackRock's third-quarter earnings that would alter our long-term view of the firm, we expect to reduce our $730 per share fair value estimate slightly to reflect even weaker flows and market performance than we were forecasting for the period. Even with the downward revision, we view the shares as being only modestly undervalued right now.

For much of the past decade, we've bemoaned the fortunes of the traditional U.S.-based asset managers, noting that they would face significant secular headwinds (from aging baby boomers to the growth of passive investing) and cyclical headwinds (primarily from a waning bull market for equities that finally ended last year), which would pressure their top and bottom lines. Our thesis for the group has expected regulatory changes around the globe aimed at increasing transparency around fees and performance, as well as pushing for a greater degree of fiduciary responsibility in retail-advised relationships, to raise the hurdles for the more traditional U.S.-based asset managers we cover. With the gatekeepers for retail intermediary platforms also becoming much more focused on fees and performance when deciding what products to place on their platforms, the industry will face fee and margin compression as active asset managers are expected to not only narrow the spread between the management fees charged for their funds and the fees attached to index-based products but spend more heavily to improve investment performance and enhance product distribution.

With the U.S.-based asset managers having reported their latest quarterly earnings, and in some cases revealing assets under management data for the end of July 2023, we have a better sense of the impact the recovery in the U.S. equity markets is having on results. As we've noted in the past, most of the traditional U.S.-based asset managers have become wholly dependent on equity market gains to grow their assets under management, given their lack of organic AUM growth, due to large exposure to higher-cost, poorer-performing active equity products relative to low-cost passive products. In an environment where fees are under pressure and profit margins are being affected by a need to spend more heavily to improve investment performance and enhance distribution, a precipitous decline in managed assets as we saw during 2022 has a large negative impact on revenue and profitability—especially considering the amount of operating leverage inherent in the asset manager business model.

While there was little in wide-moat-rated BlackRock's second-quarter earnings that would alter our long-term view of the firm, we do expect to lower our $810 per share fair value estimate slightly to account for weaker flows and market gains than we were forecasting, which affects our near-term expectations. BlackRock closed out June 2023 with $9.425 trillion in managed assets, up 3.7% sequentially and 11.0% on a year-over-year basis but below our forecast for $9.500 trillion in assets under management. Net long-term inflows of $57 billion during the quarter were below our expectations for $100 billion in positive flows and reflective of annualized organic AUM growth of 2.7% (just under the lower end of our long-term annual organic AUM growth target of 3%-5%). That said, the company did produce annualized organic AUM growth of 5.2% during the first quarter, leaving first-half organic AUM growth near the middle of our long-term forecasted range.

We've left our $810 per share fair value estimate for wide-moat BlackRock in place after updating our valuation model to adjust for changes to our forecasts for assets under management, revenue, and profitability following the release of first-quarter results. Our fair value estimate implies a price/earnings multiple of 23.2 times our 2023 earnings estimate and 20.3 times our 2024 earnings estimate. For some perspective, during the past five (10) years, the company's shares have traded at an average of 21.4 (19.9) times trailing earnings. While the company's shares trade at a hefty premium relative to the other traditional asset managers (which we feel is warranted), they are currently trading at a 20% discount to our fair value estimate.

For much of the past decade, we've bemoaned the fortunes of the traditional U.S.-based asset managers, noting that they would face significant secular headwinds (from aging baby boomers to the growth of passive investing) and cyclical headwinds (primarily from a waning bull market for equities that finally ended last year), which would pressure their top and bottom lines. Our thesis for the group has expected regulatory changes around the globe aimed at increasing transparency around fees and performance, as well as pushing for a greater degree of fiduciary responsibility in retail-advised relationships, to raise the hurdles for the more traditional U.S.-based asset managers we cover. With the gatekeepers for retail intermediary platforms also becoming much more focused on fees and performance when deciding what products to place on their platforms, the industry will face fee and margin compression as active asset managers are expected to not only narrow the spread between the management fees charged for their funds and the fees attached to index-based products but spend more heavily to improve investment performance and enhance product distribution.

There was little in BlackRock's first-quarter earnings that would alter our long-term view. We expect to leave our $810 per share fair value estimate and wide moat rating in place. While the firm's shares trade at a hefty premium relative to the other traditional asset managers (which we feel is warranted), they are currently trading at a 20% discount to our fair value estimate.

We've raised our fair value estimate for wide-moat-rated BlackRock to $810 per share from $760 after updating our valuation model with new projections for near- to medium-term growth in managed assets, revenue, and operating earnings. We have also moved our Uncertainty Rating for the firm to High from Medium, requiring a wider margin of safety before recommending the shares, which are currently only slightly undervalued relative to our revised fair value estimate.

For much of the past decade, we've bemoaned the fortunes of many of the traditional U.S.-based asset managers, noting that they would face significant secular headwinds (from aging baby boomers to the growth of passive investing) and cyclical headwinds (primarily from a waning bull market for equities that finally ended last year), which would pressure their top and bottom lines. Our thesis for the group has expected regulatory changes around the globe aimed at increasing transparency around fees and performance, as well as pushing for a greater degree of fiduciary responsibility in retail-advised relationships, to raise the hurdles for the more traditional U.S.-based asset managers we cover. With the gatekeepers for retail intermediary platforms also becoming much more focused on fees and performance when deciding what products to place on their platforms, the industry will face fee and margin compression as active asset managers are expected to not only narrow the spread between the management fees charged for their funds and the fees attached to index-based products but spend more heavily to improve investment performance and enhance product distribution.

Wide-moat-rated BlackRock reported solid fourth-quarter earnings per share of $8.29, beating the FactSet consensus of $8.08 and our own estimate of $7.84. The majority of the outperformance was driven by higher levels of assets under management, better fees, and some lower expense ratios than we had projected. With the asset manager's results coming in better than our expectations, we are likely to increase our fair value estimate by 5%-10%. BlackRock continues to be our top pick among the more traditional U.S.-based asset managers we cover, with the shares expected to trade at a slight discount to our fair value estimate after we make our revisions.

With wide-moat BlackRock's third-quarter earnings coming in worse than our expectations, owing to weaker flows and larger market and foreign currency exchange losses than we had been forecasting, and equity and credit market returns expected to be lower in the near term, we've lowered our fair value estimate for the firm to $760 per share from $850. Even so, BlackRock continues to be our top-pick among the traditional U.S.-based asset managers we cover, with the company's shares trading at a nearly 30% discount to our revised fair value estimate.