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BlackRock Active Equity Focus Aids Top Line, High Costs a Woe

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BlackRock’s (BLK - Free Report) continuous initiatives to restructure the equity business along with buyouts are expected to support the top line in the near term.

Moreover, the company has been witnessing upward earnings estimate revisions, lately. The Zacks Consensus Estimate for current-year earnings has been revised 1.5% upward over the past seven days.

In fact, despite the coronavirus-induced economic slowdown, BlackRock’s price performance has been encouraging. Shares of the company have gained 1.3% over the past six months against the industry’s decline of 14.8%.

However, as the company undertakes restructuring initiatives to modify the size and shape of the workforce, expenses are expected to remain elevated, thus hurting the bottom line to an extent.

BlackRock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Looking at the fundamentals, the company’s total assets under management (AUM) declined in the first quarter of 2020 due to concerns related to the virus outbreak. However, over the last six years (2014-2019), AUM witnessed a CAGR of 9.8%. Also, revenues (on a GAAP basis) have increased at a CAGR of 5.6% over the same time frame. The company’s efforts to strengthen the iShares and ETF operations, and increased focus on the active equity business is likely to continue aiding revenues.

Moreover, supported by a strong liquidity position, the company remains well poised to grow through opportunistic acquisitions.

While the company is highly leveraged, it is better positioned than its peers in terms of making timely payments of interests, given its current liquidity position. Hence, even if economic situation worsens further, the likelihood that BlackRock will default is less.

Further, given BlackRock’s earnings power, it is expected to sustain efficient capital deployments and enhance shareholder value in the future.

Notably, wall-street giants like JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) and many others have currently suspended share buybacks in response to the uncertainties related to the virus.

Recently, PNC Financial (PNC - Free Report) announced plans to divest its 22.4% ownership interest in BlackRock through a secondary offering and related buyback by the asset manager.

BlackRock’s expenses have increased at a CAGR of 6.3% over the last six years (2014-2019) mainly due to a rise in general and administration costs. The uptrend continued in the first quarter of 2020. Higher expenses are expected to hurt the bottom line.

Moreover, BlackRock is a geographically diversified company with presence in almost all the major markets of the world. Its dependence on overseas revenues has been gradually increasing for the last few years. Despite generating just about one-third of the revenues from overseas markets, a number of risks stemming from the regulatory and political environment, foreign exchange fluctuations and performance of the regional economy could negatively impact its top line.

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