Rally in equity markets benefiting the asset management industry
In the first half of 2012, the global financial market came under significant pressure due to the Euro zone debt crisis, slowdown in China, and the U.S. fiscal cliff issue. The asset management industry faced an uncertain outlook as investors pulled money out of risky assets.
However, investor confidence was boosted by a number of positive developments, starting in the summer of 2012. In July 2012, speaking at an investment conference in London, European Central Bank (ECB) President, Mario Draghi, said, “Within its mandate, the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough.”
Draghi’s comments were enough to ease concerns over the Euro zone debt crisis. Since then, there have been occasional jitters (Cyprus banking crisis, political crisis in Italy), however, the worst of the Euro zone debt crisis is probably over.
This has helped risky assets, especially equities. Investor confidence has also been boosted by the passage of the fiscal cliff deal earlier this year. Meanwhile, the economic outlook has also been improving. Just last week, the Labor Department reported that the U.S. economy added 165,000 jobs in April, beating the consensus forecast of 135,000 job additions.
In addition to these positive developments, another major reason behind the rally in risk assets is ultra-loose monetary policy from central banks in the developed world. The rally in equities has lifted market sentiment. Last Friday, the Dow Jones and the S&P 500 jumped to record high levels in intraday trading. With more and more investors pouring money into equity markets, it is not surprising that the asset management industry is having an excellent run. In fact, BlackRock, Inc. (NYSE:BLK) is not the only asset management company that has benefited from the rally.
State Street Corporation (NYSE:STT), another major asset management firm, has been following the same trend as BlackRock, Inc. (NYSE:BLK), moving up since July 2012. Since then, State Street Corporation (NYSE:STT) has given investors a return of nearly 27%. Although impressive, this is significantly below BlackRock’s performance in the same period. Also, State Street’s dividend yield of around 1.70% is below BlackRock’s and the industry average. This suggests that State Street Corporation (NYSE:STT) may have limited upside potential from current levels.
Another company that has been benefiting from the recent trend is UBS AG (NYSE:UBS). Although UBS AG (NYSE:UBS) is a diversified firm, in recent years, the Switzerland-based bank has increased its focus on wealth management business. The strategy seems to be working, as highlighted by UBS AG (NYSE:UBS)’s quarterly results. USB’s stock was on an upward trend since July 2012, gaining more than 52%.
BlackRock’s strong fundamentals
Apart from the macro factors, BlackRock, Inc. (NYSE:BLK)’s rally can also be attributed to the company’s strong fundamentals.
One of the reasons for BlackRock’s stock price appreciation has been exceptional growth in its financial performance over the last five years. While the investment management’s revenue has increased with a CAGR of around 16%, its net income has increased with a CAGR of more than 40%. This is a clear indication that the company has been operating with a high profit margin.
The company currently has more than $3.9 trillion in assets under management (AUM). It has seen an increase at a CAGR of 22.82% in the last five years. The equity asset class had the highest CAGR of 38% over the same period. It has also recently seen a phenomenal growth in its iShares ETF offerings. This growth in AUM has been achieved due to a number of reasons, and some of these factors were net market valuation gains and net new business and acquisitions.
In the Q1 2013 earnings, the company reported a 9% increase in its revenue. It also saw a 10% rise in its net income over last year. This increased the EPS to $3.65 per share, up from $3.14 per share a year earlier, beating the consensus estimate by $0.07. The company also reported strong operating margins of 42.6%. Its iShares ETF business saw net long-term inflows of $25.6 billion during the quarter. This unit is gradually becoming one of the major revenue drivers for the company.
Recent quarterly earnings results suggested that investors are now willing to invest in riskier assets. The company reported an AUM increase of $33.7 billion in equity offerings out of the total net inflows of $39.4 billion into long term funds. This was the first strong equity performance since the global financial crisis in 2008. The inflows in iShares ETF also shifted from emerging market products into U.S. broad market and large cap equities. This reflects an increasing confidence in the economy among investors. Fear of an interest rate rise led to outflows of $2.6 billion in the company’s bond funds. All these factors indicate that investors are expecting a strong market rally this year. This will lead to an increase in the investments by individuals and institutions, further contributing to the company’s revenue.
The company has increased its dividends at a rapid rate, even during the subprime crisis. It pays out 43% of its earnings as dividends. It increased from a quarterly dividend of $0.78 in 2008 to $1.50 in 2012. Recently, it has further increased it by 12% to $1.68. The current dividend yield is 2.7%, which is expected to increase further. The company has also been buying back shares, giving investors even higher returns.
BlackRock has been acquiring firms in order to expand. Its acquisition of Barclays’s Global Investors in 2009 added iShares in its product portfolio. This helped it reach a larger number of investors. This also added around $1.8 trillion of AUM. It acquired Claymore’s Canadian ETFs and rebranded it under iShares. This year it has announced the acquisition of Credit Suisse’s ETF as well.
These acquisitions have changed the company’s AUM mix from predominantly active fixed income and equity in 2007 to a diversified product range.
Bullish on BlackRock
BlackRock, Inc. (NYSE:BLK) is currently trading at a trailing P/E ratio of around 17.52, which is at a slight premium compared to its industry average.
State Street Corporation (NYSE:STT) is currently trading at a trailing P/E ratio of 13.12, which is slightly lower than the industry average. Its P/S is also at a discount to industry average. UBS’s forward P/E ratio is also at a little discount to the industry average, while its P/S ratio is almost equal to the industry average.
While BlackRock shares are currently trading at a premium to the industry, this is justified, given the company’s anticipated earnings growth. The consensus EPS estimate for BlackRock, Inc. (NYSE:BLK) for the second quarter is $3.84. For the third quarter, the company expected to report EPS of $4.02, and for the fourth quarter, the EPS is expected to come in at $4.49 in the current fiscal year. Over the next five years, EPS is expected to grow at more than 13%. On the other hand, earnings growth forecast for both, State Street Corporation (NYSE:STT) and UBS AG (NYSE:UBS), for the next five years is moderate.
There are a number of factors that will drive the company’s growth in the next three to five years. Some of these factors are: growing assets under management, high profit margins, growing iShare segment, Credit Suisse’s ETF’s acquisition, strong financial performance, and improving market sentiment. Therefore, if you are someone who likes to invest and hold the stock for long periods, BlackRock, Inc. (NYSE:BLK) may be the investment you are looking for.
The article Invest In This Financial Stock For Long Term Returns originally appeared on Fool.com.
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