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Analyst Blog

On May 23, 2013, we reiterated our long-term recommendation on BlackRock, Inc. (BLK - Analyst Report) at Neutral based on its improved capital deployment activities and acquisition plans. However, an elevated cost structure and high dependence on fee-based revenue are the causes of concern.

Why the Neutral Stance?

BlackRock’s first-quarter 2013 adjusted earnings came in at $3.65, surpassing the Zacks Consensus Estimate of $3.59. Results were primarily driven by top-line growth, partially
offset by higher operating expenses. Moreover, Assets Under Management (AUM) showed a decent improvement.

The Zacks Consensus Estimate for 2013 rose 3.3% to $16.01 per share over the last 60 days. For 2014, the Zacks Consensus Estimate also went up 3.3% to $18.26 per share over the same time frame. Hence, the company currently has a Zacks Rank #2 (Buy).

BlackRock’s capital deployment activities have been impressive. Earlier, in 2013, the company approved an increase in its share repurchase authorization, allowing it to repurchase upto 10.2 million shares of the common stock.

Moreover, BlackRock has expanded largely through acquisitions. Recently, it entered into a definitive agreement with MGPA, an independent private-equity property investment advisory firm, to purchase the latter. So far, the acquisition of Barclay’s investment remains the biggest deal, which nearly doubled BlackRock’s AUM at that time. Further, BlackRock acquired Credit Suisse’s European ETF operations, which reflects its ample acquisition opportunities in the overseas markets.

However, BlackRock’s dependence on investment advisory, administration fees and securities lending can adversely impact the company’s financials due to changes in AUM owing to market fluctuations, regulatory changes or foreign exchange transactions.

Moreover, BlackRock is a geographically diversified company. Owing to this, its top-line growth can be negatively affected by a plethora of risks stemming from the international regulatory and political environment and foreign exchange fluctuations.

Other Major Banks to consider

Some other banks worth a look include AllianceBernstein Holding L.P. (AB - Snapshot Report), GAMCO Investors, Inc. (GBL - Snapshot Report) and Virtus Investment Partners, Inc. (VRTS - Snapshot Report). All these carry a Zacks Rank #1 (Strong Buy).

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