Lowering Our Fair Value Estimate for BlackRock

While there was little in wide-moat BlackRock's BLK first-quarter earnings to alter our long-term view of the firm, we expect to lower our fair value estimate to $500 per share to account for our expectations for slightly weaker AUM levels and fees than we had been forecasting for the near to medium term. BlackRock closed out the March quarter with $6.467 trillion in managed assets, down 13.0% (0.7%) sequentially (year over year), with organic growth, market losses, and adverse currency exchange all being slightly worse than our own projections.

While the company had recorded positive flows through the first half of the quarter, outflows from both equity and fixed-income products over the last six weeks of the March quarter left the firm with $18.7 billion in long-term net outflows for the period (reflective of a negative 1.1% rate of organic growth). This is likely to be about as good as it is going to get for most of our coverage as we move through first-quarter earnings season, noting that (according to Morningstar Direct) there were $224 billion in outflows across the industry from active and passive open-end funds and ETFs during the March quarter, with total monthly outflows of $327 billion in March being far worse than the single worst month during the 2008-09 financial crisis (October 2008), which had $104 billion in long-term outflows.

Average long-term AUM growth of positive 12.2% year over year during the first quarter translated into an 8.9% increase in base fee revenue growth, as product mix shift led to a 3.6% decline in the firm's realization rate. Total revenue was up 10.9% when compared with the prior year's quarter. As for profitability, BlackRock posted a 250-basis-point decline in first-quarter operating margins (when looked at on an adjusted basis) to 34.3%, which given some of the added general and administrative costs in response to the COVID-19 pandemic and subsequent market and economic dislocation seems about right to us.

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