Positive Flows Offset Market Losses in BlackRock's Q3

There was little in wide-moat BlackRock's BLK third-quarter results that would alter our long-term view of the firm. We are leaving our $880 fair value estimate in place. BlackRock closed the September quarter with $9.464 trillion in managed assets, down 0.3% sequentially but up 21.2% year over year, with positive flows and market gains driving most of the improvement over the past year. While annualized organic growth in assets under management of 4.5% during the third quarter was in line with our long-term annual target range of 3%-5%, total quarterly inflows of $98.0 billion were about $20 billion lower than our expectations; we had assumed that third-quarter flows would pick up even more following a weaker June quarter for organic growth. Still, flows for the September quarter were well above the $75.1 billion quarterly run rate of the previous eight quarters.

While average AUM increased 24.8% year over year during the third quarter, BlackRock recorded a 22.3% increase in base fee revenue growth as product mix shift and money market fee waivers led to a 2.0% decline in the overall realization rate compared with the prior-year period. Total revenue was up 15.6% year over year as lower performance fee income was not completely offset by higher distribution, technology, and risk management fees. Top-line growth of 21.7% through the first nine months of 2021 was in line with our forecast 18%-22% range for the full year. BlackRock posted an 80-basis-point increase in year-to-date adjusted operating margin to 45.1%, leaving it slightly above our projected range of 44%-45% for the full year. Unlike for most of the other traditional U.S.-based asset managers we cover, we project an improvement in BlackRock's operating profitability over the next five years, with adjusted operating margin expected to come in at 45%-47% on average, compared with 44.2% during 2016-20.

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