BlackRock's Acquisitions Fuel AUM Growth, Costs a Concern
On Aug 10, 2016, we issued an updated research report on BlackRock Inc. BLK. Despite elevated expenses, increased dependence on fee-based revenues and mounting regulatory restrictions, the company seems well poised to capitalize on acquisitions to enhance its AUM growth. Also, its initiatives to gain market share in the ETF business are expected to drive revenue growth further.
BlackRock has grown majorly through acquisitions, both domestic and overseas, with the acquisition of Barclays Global Investors in 2009 being the biggest. This deal had nearly doubled the company’s AUM at that time. Besides, the company enjoys ample acquisition opportunities due to its strong balance sheet position.
Additionally, the company has an effective capital deployment policy in place. There have been hikes in quarterly dividends on a regular basis. We believe that the company’s enhanced earning power will allow it to continue returning capital to its shareholders.
Moreover, BlackRock’s strong global presence enables it to enjoy diversification and organic growth benefits. The company aims to improve its top line through its brand initiatives for the iShares and ETF businesses along with the gradual improvement in the market conditions.
However, escalating costs due to the increase in regulatory compliance costs, compensation costs as well as higher marketing costs remains a matter of concern. Nonetheless, the company expects G&A expenses to remain stable in 2016 on a year-over-year basis.
Further, BlackRock’s high dependence on overseas revenue increases its exposure to a number of risks stemming from regulatory and political environment, foreign exchange fluctuations and performance of regional economy, whichcan negatively affect its top-line growth.
Driven by these concerns, analysts are bearish on the stock. Over the last 30 days, the Zacks Consensus Estimate declined 0.9% and 1.4% for 2016 and 2017, respectively.
Currently, BlackRock carries a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
Some better-ranked investment management firms includeApollo Global Management, LLC APO, Federated Investors, Inc. FII and Principal Financial Group Inc. PFG, holding a Zacks Rank #2 (Buy).
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