Thursday, April 01, 2010

Blackrock (NYSE:BLK): Downgraded to Sell at Citi, Downgraded to Hold at Deutsche

Asset managers are getting comments from two tier-1 firms today:

- Citigroup is out with a lenghty call on several names noting that following recent bounce, fundamental cross currents, and generally in line to consensus EPS expectations they initiate/expand sector coverage with a balanced view. Yet, given Asset Managers tend to outperform in rising rate backdrop, improving flow mix, and robust FCF stories, the firm would look to buy the dips.

Citi downgrades BLK from Buy to Sell and add as Top Picks Live (TPL!) LC pick. Upgrades WDR from Hold to Buy and add as TPL! SC pick. BEN moves to Buy from Hold with $130 tgt (prev. $120). AB goes to Buy from Hold with a $35.50 tgt (prev. $28).

The most significant comments are on Blackrock (NYSE:BLK) with Citi downgrading the name to a Sell from Buy and adding to Top Picks Live Sell List with a $190 tgt (prev. $269).

While they particularly like BLK’s strategic positioning post BGI, they nonetheless believe 2010-2012 “adjusted” EPS consensus estimates are well too high as investors are: 1) overstating BGI contribution, with the mistake compounded by overly robust stub earnings in 4Q related to the 12/1/09 close; and, 2) underestimating aggressive reinvestment spending cycle. In turn, BLK is no longer a “step function” EPS story into 2011, suggesting investors need to value BLK on 2010 prospects. And, with sharp downside to consensus, uneven flow & capital management prospects in the ST, they believe the multiple is likely to contract. Citi believes 1Q results are likely to be a negative catalyst on the stock, particularly as investors
have been recently ratcheting up EPS expectations: they are 7% below the “Street”

Lowering earnings estimates: Citi reduces their 2010 adjusted EPS estimate $0.75 (7%) to $10.25, and reduces their 1Q10 estimate 9%, or $0.24, to $2.31. For 2011, the firm reduce their forecast 9%, or $1.12, to $11.68. Citi's 2012 estimate decreases 6% ($0.84) to $13.16. The revisions reflect lower flows and higher investment spending from both legacy BLK plus BGI.

Consensus likely 300 bps to 400 bps too high on margins: Citi's revised 2010-11 adjusted EPS estimate are 8% and 12% below First Call. Believe “Street” modeling 42% to 43% margin versus a likely range of 38% to 39%.

Reinvesting for a brighter tomorrow, but likely to crimp margins now: The central message arising from CEO presentation at the Citi Financial Services conference in March and 2009 Form 10-K filed with SEC is that management will be plowing back cost savings from the BGI merger along with renewed spending on a number of growth initiatives. As a result, Citi has flattened their margin assumptions to the run rate range of 38.5%. Given the mismatch between investment spending and revenue generation, they expect profitability to be tempered.

- Deutsche Bank is also downgrading BLK, this time to a Hold from Buy while lowering their tgt to $235 (prev. $260).

Firm notes they are downgrading BLK due to its outperformance over the past year and lower expected bottom-line growth going forward, driven primarily by less margin expansion, but also some near-term flow headwinds. While they still think BLK is well positioned over the long term, given the valuation on their lowered estimates (lowered 2010E to $10.95 from $11.25 and 2011E to $12.85 from $14.00), they see limited upside in the near term.

Margin expansion is likely to be limited in the near term
Despite closing the BGI transaction and benefitting from the related synergies, management expects current margins to remain at consistent/current levels due to a focus on re-investing in the business for long-term growth. While they believe it is the right move for the long run, it means more of the bottom-line growth will depend on top-line growth in the near term, and given the sizeable asset base and some areas of flow headwinds, firm's growth outlook is less optimistic.

Top-line growth is likely to face a few near-term headwinds
In the near term, BLK faces a few top line / flow headwinds, some of which are industry related and some that are more specific to BLK given its mix. These headwinds include significant money market outflows (though the offset is a favorable mix shift), quant outflows, seasonally weak ETF flows, and potential fixed income pressures with rising interest rates, partially offset by up markets.

Notablecalls: BLK is likely going to get hit on this as at least some of the CSFB buyers (upgraded 2 weeks ago, see archives) are going to bail on this double downgrade. Citi's call reads ugly for the name as the $190 tgt is over 10% below current market price.

With the stock being added to Citi's Top Picks Live Sell list, it means Citi is calling for market participants to outright short the name.

BEN, WDR & AB are likely to trade up as shorts have piled in there, I suspect.

I think BLK will trade towards the $210 level today, back where it was before the CSFB upgrade.


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