Market Gains, Flows Lift BlackRock's AUM to Record High

There was little in wide-moat BlackRock's (BLK) second-quarter earnings that would alter our long-term view of the firm. We are leaving our $880 per share fair value estimate in place. BlackRock closed out the June quarter with a record $9.496 trillion in assets under management, up 5.4% sequentially and 29.8% year over year, with flows and market gains driving most of the improvement. That said, annualized organic AUM growth of 2.8% during the June quarter was just below the lower end of our long-term annual target of 3%-5%, with total quarterly inflows of $59.7 billion during the period about $15 billion higher than our expectations (which had assumed that second-quarter flows would drop off from a really strong March quarter this year). Flows for the June quarter were lower than the $83.3 billion quarterly run rate of the past eight quarters, though. While average AUM was up 35.0% year over year during the second quarter, BlackRock recorded only a 26.7% increase in base fee revenue growth as product mix shift (and money market fee waivers) led to a 5.2% decline in the firm's overall realization rate compared with the prior year's period. Total revenue was up 32.5% year over year, though, as performance fee income more than trebled and the company pulled in more from distribution fees, as well as technology and risk management revenue. While top-line growth of 25.3% through the first half of the year is higher than our forecast 13%-18% for the full year, we expect the back half of 2021 to pose higher hurdles than the first half of the year did. As for profitability, BlackRock posted a 200-basis-point increase in first-half adjusted operating margins to 44.7%. Unlike most of the other U.S.-based asset managers we cover, we are projecting an improvement in BlackRock's operating profitability over the next five years, with the firm's adjusted operating margins expected to come in at 45%-46% on average compared with 44.2% during 2016-20.

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