BlackRock Continues to Post Positive Flows Despite the Market Selloff

There was little in wide-moat-rated BlackRock’s (BLK) second-quarter earnings that would alter our long-term view of the firm. We are leaving our $850 per share fair value estimate in place and consider the shares to be undervalued. BlackRock continues to be our top pick among the more traditional U.S.-based asset managers we cover. The company’s shares are currently trading at a 30% discount to our fair value estimate—compared with 20% on average for the nine firms in our coverage—and it represents a solid entry point for long-term investors.

BlackRock closed out the June quarter with $8.487 trillion in managed assets, down 11.3% sequentially and 12.4% on a year-over-year basis, but in line with our projection for $8.525 trillion in assets under management, or AUM. Net long-term inflows of $68.6 billion were impressive, considering the ongoing disruption in the equity and credit markets, and better than our forecast for $40 billion. The inflows were reflective of an annualized organic AUM growth rate of 3.1%, at the lower end of our long-term target calling for 3%-5% annual growth.

Although average AUM was down 7.2% year over year during the second quarter, BlackRock recorded only a 1.8% decline in base fee revenue growth when compared with the prior year’s period due to shifting product mix and a 1.4% increase in its realization rate. Total revenue was down 6.1% year over year, though, dragged down by lower levels of performance fee income. Even so, year-to-date top-line growth of 0.1% was slightly better than our full-year forecast calling for a low-single-digit revenue decline. As for profitability, BlackRock posted a 320 (50) basis-point decline in second-quarter (year-to-date) GAAP operating margins to 36.9% (37.2%). On an adjusted basis, the firm’s operating margins were 43.7% (43.9%).