In a high inflation macroeconomic environment, with mounting geopolitical pressures causing the stock market to experience one of its worst first quarters in history, considering an investment in the world’s largest asset manager and leading ETF provider might seem counterintuitive.
Yet, it is the positioning for the long-run and the diversified business of Blackrock (BLK) that makes a good case for the stock, especially after the recent re-rating. I am bullish on BLK stock.
Stock Price Performance
After being a beneficiary of the extended 2010’s bull market, the stock fell sharply following the breakout of the COVID-19 pandemic, only to embark on a swift recovery and make new all-time highs. Capturing the broader market participation and the popularity increase of passive investing, Blackrock reached price levels near $1,000 per share.
Consequently, as the stock market entered its current correction/bear phase, it has recorded major losses, now trading at $610 or nearly 37% off 52-week highs. Currently, Blackrock trades at a $92.4 billion market cap and has a respectable 3.2% forward dividend yield.
An Overall Successful Business
Blackrock’s revenue primarily derives from the base fees the company earns across its product range. For the first quarter of 2022, 29% of fees originated from institutional clients, 32% from retail, and 39% from ETFs, highlighting a well-diversified mix. Geographically, there is still room for both growth and more diversification, as 65.7% of Blackrock’s Q1 revenue came from North and South America, 29.7% came from the EMEA region, and just 4.6% came from Asia.
Despite a declining stock market and deteriorating sentiment, the company still recorded positive flows in Q1 2022, both from retail and institutional clients. Blackrock’s popular low-cost, passive-investing offerings are likely to carry revenue and income growth for many years to come.
In 2021, Blackrock grew its top line by 20%, posting yet another well-performing fiscal year. Over the last 10 years, revenue has grown at a 7.9% CAGR, with net income growing at a 9.8% annualized rate. Blackrock’s stock has returned more than 330% over the past 10 years. Profitability is also sector-leading, with 50% gross and 31% net margins, and so is free cash flow generation.
As of March 31, 2022, Blackrock maintained $9.57 trillion in assets under management, reaffirming the company’s position as the largest asset manager in the world.
Blackrock Has Shareholder Returns in Mind
Blackrock has been effectively focusing on building shareholder value for many years now. On the dividend aspect, the company has increased its payments for 18 years, at an impressive 13% five-year and 12% 10-year CAGR, outpacing almost every other stock in the financial sector. Currently, BLK pays a 3.2% dividend, with analysts expecting revenue growth to continue steadfast over the next years.
The firm also increases shareholder value by steadily reducing its share count over time. Average shares outstanding have decreased from 175 million in 2012 to 152 million as of the last filing. In 2021, Blackrock returned $3.7 billion to shareholders via dividends and share repurchases.
The Valuation Perspective
While financial sector stocks, especially banks, generally trade at low valuation multiples, usually close to 10x P/E, Blackrock has historically been an outlier. That is mainly because of better growth potential, extended profitability capacity, and the moat the company possesses.
Currently, BLK trades at a 15.5x P/E, which is a record low over the last three years, excluding the COVID-19 crash in early 2020. In fact, the stock has traded at an average of 20.7x P/E over the last three years and slightly lower in the previous 10. Only two times since 2013 has Blackrock traded below 15x earnings, while every time multiples approached the threshold, the stock rebounded.
As a result, it appears that the current turbulence in the markets leaves investors with a valuable opportunity. The stock’s 3x price/book value per share also implies a 20% discount for BlackRock compared to its three-year average.
Wall Street’s Take
Turning to Wall Street, Blackrock has a Strong Buy consensus rating based on eleven Buys, three Holds, and zero Sells assigned in the last three months.
The average BlackRock price target is $870.07, which represents 42.8% upside potential from current price levels, with a high forecast of $972 and a low forecast of $725.
While sinking markets spread fear and hesitation among investors, they also offer some undeniable buying opportunities. Blackrock’s business positioning, top and bottom-line growth, shareholder value appreciation strategy, and attractive valuation, indicate that the company offers, in fact, such an opportunity.
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