Solid Quarter for BlackRock, Boosting Our FVE

While there was little in wide-moat BlackRock's BLK first-quarter earnings to alter our long-term view of the firm, we have increased our fair value estimate to $810 per share from $750 to account for the continued recovery in the markets following the steep coronavirus-induced sell-off during the first quarter of 2020. More than half of the change comes from our expectation that BlackRock will have more in AUM during 2021-25 than we were previously forecasting, with the remainder coming from a slightly better fee outlook, as well as more stability in their margins than we were previously forecasting.

BlackRock closed out the first quarter with a record $9.007 trillion in managed assets, up 3.8% (39.3%) sequentially (year-over-year), with solid organic growth and market gains more than offsetting adverse currency exchange during the period. Annualized organic AUM growth of 6.8% was well above our long-term target of 3%-5% annually but given that the first quarter is generally a stronger quarter for flows we think things will moderate some as the year progresses. More importantly, BlackRock continues to see solid organic growth from its higher fee earning active equity platform, which provides some offset to ongoing fee compression.

Although average AUM was up 23.3% year over year during the first quarter, BlackRock recorded a 17.6% increase in base fee revenue growth as product mix shift led to a 4.6% decline in the firm's realization rate. Total revenue was up 18.5% when compared with the prior year's quarter, though, as performance fee income more than trebled. As for profitability, BlackRock posted an 80-basis-point increase in first-quarter operating margins (when looked at on an adjusted basis) to 36.6%. Unlike most of the other U.S.-based asset managers we cover, we are projecting an improvement in BlackRock's operating margins over the next five years, with the firm's margins expected to average around 40% on an adjusted basis.

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