BlackRock, Inc.’s (BLK - Free Report) long-term issuer and senior unsecured ratings have been upgraded from A1 to Aa3 by Moody's Investors Service. While the company’s short-term issuer rating has been affirmed at P-1, its rating outlook has been changed to stable from positive.
Rationale Behind Rating Upgrade
BlackRock continues to be a technology leader in the asset management industry. Its strong global presence, broad product diversification, revenue mix and steadily improving assets under management (AUM) are expected to boost its revenues.
Moreover, BlackRock holds a strong market position, given its continued investment in U.S. iShare core ETFs. This investment will continue to drive growth across a broader range of iShares precision exposures in the near term.
Further, BlackRock holds a competitive advantage over its peers, as with the help of Aladdin platform, it can quickly adapt to changes in the industry. The company is using the platform to build new revenue streams, increase fund sales while improving its active management business.
In fact, its investment in U.S. iShare ETFs is also likely to drive growth across its active business in the future.
Notably, BlackRock’s inorganic growth efforts also seem impressive. The company has expanded largely via acquisitions — both domestic and overseas. In the recent past, it announced deals to acquire Tennenbaum Capital and Citibanamex’s Asset Management business in Mexico. In 2017, it acquired First Reserve Energy Infrastructure Funds and Cachematrix while buying Bank of America's Money-Market Fund Business in 2016. These deals, along with the previous ones, are expected to help the company strengthen its revenue base further.
In fact, the company’s inorganic growth strategies have contributed to most of its AUM growth, depicting a six-year CAGR of 10.6% (2012-2017).
Additionally, with the decrease in tax obligations after the passage of the Tax Cuts and Jobs Act of 2017, the company’s cash flow position has also improved.
Thus, on the basis of the abovementioned positives, long-term ratings of the company have been upgraded.
What Can Drive Ratings Up?
A further upgrade in ratings is possible if the company’s scale i.e. revenue less distribution costs approaches $18 billion. If the industry adoption of Aladdin continues to rise or total debt/EBITDA ratio remains below 0.8 times, it can also result in an upgrade.
What Can Lead to Ratings Downgrade?
A rating downgrade could occur if the company fails to successfully convert AUM growth to revenue growth or if its passive products deteriorate because of any market event or a revival in the use of active management strategies. Ratings can also be downgraded if the company’s scale drops to less than $10 billion or if the leverage is sustained above 1.5 times EBITDA.
In the past year, BlackRock’s shares have rallied 26%, outperforming the industry’s growth of 12.7%.
Currently, the stock has a Zacks Rank #3 (Hold).
Stocks to Consider
A few better-ranked stocks in the finance space are Farmers Capital Bank Corporation , Associated Banc-Corp (ASB - Free Report) and Lazard Ltd (LAZ - Free Report) .
In the last 60 days, Farmers Capital witnessed an upward earnings estimate revision of 5.9% for the current year. Additionally, the stock has gained 32.3% in the past year. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Associated Banc-Corp also flaunts a Zacks Rank of 1. Its earnings estimates for the current year have been revised 11.4% upward over the last 60 days. Its shares have gained 11.3% in the past year.
Lazard currently has a Zacks Rank #2 (Buy). Its earnings estimates for the current year have been revised 10.6% upward over the last 60 days. The company’s shares have increased 20.8% in a year’s time.
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