On Aug 21, 2013, we reiterated our long-term recommendation on BlackRock, Inc. (BLK) at Neutral based on its improved capital deployment activities and acquisition plans. However, an elevated cost structure and high dependence on fee-based revenues are the causes of concern.
Why the Neutral Stance?
BlackRock’s second-quarter 2013 adjusted earnings came in at $4.15 per share, substantially surpassing the Zacks Consensus Estimate of $3.82. Results were primarily aided by increased top line, partly offset by higher operating expenses. Moreover, augmented assets under management (:AUM) came as a positive.
The Zacks Consensus Estimate for 2013 remained stable at $15.92 per share over the last 30 days. However, for 2014, the Zacks Consensus Estimate went down marginally to $17.52 per share over the same time frame. Therefore, the company carries a Zacks Rank #3 (Hold).
BlackRock’s capital deployment activities have been impressive. Earlier, in 2013, the board of directors of the company approved an increase in share repurchase authorization, allowing it to repurchase upto 10.2 million shares. For the six months ended Jun 30, 2013, the company repurchased 1.9 million common shares in open market transactions under its existing share repurchase program.
Further, BlackRock has expanded largely through both domestic and overseas acquisitions. Recently, in Jul 2013, BlackRock acquired Credit Suisse’s European ETF operations, which reflects its ample acquisition opportunities in the overseas markets.
So far, the acquisition of Barclay’s investment management business remains the biggest deal, which nearly doubled BlackRock’s AUM at that time.
However, BlackRock’s increased 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 adversely affected by a plethora of risks stemming from the international regulatory and political environment and foreign exchange fluctuations.
Other Major Banks to consider
Some better performing banks worth a look include Firstbank Corporation (FBMI), Mercantile Bank Corp. (MBWM) and PrivateBancorp, Inc. (PVTB). All these carry a Zacks Rank #1 (Strong Buy).
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