The BLK stock has underperformed asset manager peers by 11% YTD, which provides an entry point for longer-term investors to lever three of the strongest secular drivers of AuM growth – ETF strategies, payout market, and international distribution. More importantly, the firm expects strong EPS and flows to drive stock price outperformance over the intermediate term, and believe investors are already aware of the seasonal issues that impact 1Q flows in ETFs, Money Market Funds, and the risk to quantitative funds and money market flows in 2010. Accordingly, they are raising their 2011 EPS estimate to $13.50 from $13.30, which compares to $13.22 for consensus.
BLK has several structural advantages that will keep the barriers to entry high in its core growth markets (ETF, fiduciary, LDI, advisory). Additionally, BLK has the strongest and widest distribution platform among global asset managers in CSFB's view with significant scale in both core retail channels (wirehouse, mutual fund, insurance, DC) and core institutional channels (DB, endowments, foundations, sovereign wealth funds, unions). BLK also benefits from the ownership of three of the larger product distributors in the world (Bank of America / Merrill Lynch, Barclays, and PNC Bank). With BLK's mostly high relative fund performance and wide product menu leveraging its distribution strength, it will be harder for weaker/smaller competitors to catch-up, and they look for continued industry consolidation to benefit BLK. After a weak start to 2010 due to seasonal net flow issues, the firm expects BLK's organic growth rate to increase from 0% in 1Q to 1.0% in 2Q, and then continue to improve into 2011. They estimate their 2011 net flow forecast of $174B (5% organic growth) is about $60B higher than consensus.
How Can a $3 Trillion Asset Manager Grow?
With CSFB estimate of 10-12% market share for BLK of the total global asset management market, the main question is how can BLK continue to grow organically? The firm views the three drivers as: 1) strong distribution, 2) deep product in secular growth markets, and 3) overall strong fund performance. For the most part, BLK meets these three objectives with the largest global institutional platform ($1.3T of AuM with DB plans, endowments, foundations, sovereign wealth funds), and with among the top retail distribution platforms in the US and Western Europe (broker/dealers, financial supermarkets, banks). Additionally, BLK already has large product in all of the key long-term growth markets – ETF / Passives, Liability Driven Investing, Defined Contribution, Balanced (Fiduciary, Target Date Funds), which most competitors lack. On the final point, relative fund performance, BLK is the second highest performing asset manager in the US with 63% of AuM rated 4 or 5 stars by Morningstar vs. 32.5% for peers.
CSFB estimates stronger earnings/accretion from BGI will drive a $0.06 EPS beat in 1Q10, and help offset weaker flows q/q. However, they look for strong flows in 2Q to lift the BLK stock, and EPS above the consensus (‘10 EPS = 11.36 vs. 11.19). They also believe BLK is best-positioned to benefit from 3 of the 4 secular drivers of AuM growth, which are 1) ETF products, 2) payout market (retirees in US and Western Europe), 3) international distribution. One area that BLK can upgrade is its retail distribution in non-Japan Asia and LATAM (growing emerging market middle class is fourth secular driver). Risks to the BLK stock are 1) greater than expected money market fund and quantitative outflows in ‘10, 2) low performance fees in real estate, and 3) a decline in short-term solution assignments (like Bear Stearns, AIG mandates).
While the SimFund / AMG data releases provide new data points for BLK’s US fund flows (especially money market), the firm views the 1Q and 2Q earnings releases (in late April and late July) as the next key catalysts. Due to the seasonal impact on 1Q flows, they estimate 2Q represents the next all-around strong quarter for BLK.
Notablecalls: It's not every day one can call for up to 10 pts of intraday upside in a stock. That's the likely scenario on BLK today.
BLK has lagged the other asset managers over the past couple of months, mainly due to AUM concerns, regulation and probably due to the fact the acquired BGI is very quant-heavy in its nature. Quant funds have been having a tough time again, I suspect.
Yet, as CSFB points out BLK is the best of breed operator in the space with a lot of exposure to growth markets. Better buy the powerhouse when it's under performing.
I think BLK will trade up today and nicely so. $220+ is my guess today.