BlackRock Continues to Post Positive Flows Despite Selloff in Equity and Credit Markets

With wide-moat BlackRock’s (BLK) third-quarter results coming in worse than our expectations owing to weaker flows and larger market and foreign currency exchange losses than we had forecast, we expect to lower our fair value estimate by 5%-10%. Even so, BlackRock continues to be our top pick among the more traditional U.S.-based asset managers we cover, with the shares still expected to trade at a meaningful discount to our fair value estimate after we make our revisions.

BlackRock closed the September quarter with $7.961 trillion in managed assets, down 6.2% sequentially, 20.5% year to date, and 15.9% year over year. This was around $425 billion lower than our projections, due primarily to higher market losses and adverse currency exchange than we forecast for the quarter.

Net inflows of $65.2 billion into long-term assets under management were impressive, considering the ongoing disruption in the equity and credit markets, but still worse than our forecast for more than $100 billion. Meanwhile, year-to-date net inflows of $247.6 billion were reflective of an annualized organic AUM growth rate of 3.3%, at the lower end of our long-term target of 3%-5% annual growth.

Although average long-term AUM was down 12.3% year over year during the third quarter, BlackRock recorded a 10.4% decline in base fee revenue growth when compared with the prior-year period due to shifting product mix and an increase in its realization rate. Total revenue was down 14.6% year over year, dragged down by lower performance and distribution fee income. Year-to-date top-line growth of negative 5.1% was in line with our full-year forecast for a mid-single-digit revenue decline. BlackRock’s GAAP operating margins declined 290 basis points to 35.4% in the third quarter and 130 basis points to 36.6% year to date. On an adjusted basis, operating margins were 42.0% for the quarter and 43.3% year to date.