Spencer Platt
It is probably an understatement to say the global financial system is currently experiencing some turbulence.
Silicon Valley Bank of SVB Financial Group (SIVB) and Signature Bank (SBNY) failed, and a group of banks had to lend First Republic Bank $30 billion.
Credit Suisse has had to borrow up to $54 billion from Switzerland’s central bank.
A lot of financial stocks are lower as a result.
BlackRock, Inc. (NYSE:BLK) stock is down by 17.33% from its high in early January. BlackRock is one of the world’s leading providers of investment advisory and risk management solutions.
The S&P 500 (SP500) is down 6.3% from its high this year, and stocks in the financial sector have on average declined 16.35% from the high this year.
Although its shares are lower, BlackRock is well-positioned and has opportunity amid the market turbulence for several reasons.
Financial Strength
First, BlackRock has financial strength and a sturdy balance sheet. According to Moody’s, BlackRock had an Aa3 rating in October 2022, the highest rating Moody’s has given to an asset manager.
Per the ratings agency, BlackRock has market-leading scale, strong profitability, moderate financial leverage, and a sound liquidity profile. Adjusted operating margins have exceeded 40% for years, and the company’s leverage was 1.1x adjusted EBITDA in October 2022.
According to McKinsey, BlackRock has had organic growth of long-term assets under management (“AUM”) on average of just under 5% per annum in the past 10 years, versus the global industry average of 2.5%.
Even during challenging conditions last year, BlackRock’s operating margins have been sturdy. In 2022, BlackRock had an adjusted operating margin of 42.8% despite the market headwinds where there were joint double-digit declines in the broader global equity and bond markets. In addition, BlackRock also faced foreign exchange headwinds given the strong dollar for the year.
BlackRock is also profitable. In 2021, the company had net income of $6.254 billion, and in 2022, the company had net income of $5.391 billion given the headwinds.
Furthermore, BlackRock is growing organically when factoring out broader market price changes. Despite the weakness in the broader equity and bond market in 2022, BlackRock had $393 billion of full year long term net inflows for the year, reflecting 4% organic asset growth.
M&A
BlackRock also has M&A opportunity given the market turbulence.
BlackRock has great margins that, when combined with the company’s strong balance sheet, allows the company to not only weather the storm successfully but also potentially go on the offense.
As BlackRock CFO Gary Shedlin said during the Q4 earnings call,
BlackRock’s industry-leading organic growth is a direct result of the disciplined investments we have consistently made through market cycles. As we’ve shown throughout our history, it’s often in times of greatest uncertainty where BlackRock’s differentiated model enables us to continue playing offense and we emerged even stronger.
Recently there have been rumors that BlackRock considered buying part of the beleaguered investment bank Credit Suisse Group AG (CS).
Although it has since denied having any interest in buying any part of Credit Suisse, BlackRock nevertheless has done M&A successfully in the past.
During the financial crisis, CEO Larry Fink did the “deal of the decade” by buying BGI, which owned iShares, from Barclays for $15.2 billion in cash and stock.
In June 2021, iShares was the world’s largest exchange-traded fund (“ETF”) provider, with assets of $2.8 trillion versus BlackRock’s $9 trillion at the time. More impressively, iShares accounts for a substantial percentage of BlackRock’s inflows. In 2022, iShares had net inflows of $220 billion versus BlackRock’s total net inflows of $393 billion.
iShares, like BlackRock, has many financial products since every investor is different. Some investors may be better suited for financial products that are more defensive, while other investors may be suited for perhaps a broader S&P 500 passive investment. By offering many different choices with both iShares and its own products, BlackRock can gain more business and more customers.
During that time, Fink also advised many top CEO’s and government officials. BlackRock even had government contracts to help the U.S. government’s management of toxic assets of various firms.
Given BlackRock’s resources and expertise, the government counted on the company to do its part in helping try to stabilize the financial system during 2008 and 2009 and it is almost certain that the U.S. government will seek BlackRock’s help again perhaps this year if the financial system again undergoes substantial turbulence.
If there is turbulence, BlackRock could be in a position to buy companies or assets given its strong balance sheet and financial profitability.
To add value, BlackRock does not have to buy entire companies that are potentially in financial trouble.
Instead, BlackRock could buy part of the company or it could even buy parts of the companies that are in bankruptcy.
Stock Repurchases
Given that BlackRock is already doing pretty well in terms of past organic growth, BlackRock might not do any M&A. It could repurchase its own stock instead.
Since 2013, BlackRock has bought $13 billion worth of stock, reducing total shares outstanding by 13%.
Despite the market turbulence, BlackRock plans on buying more stock this year.
For 2023, BlackRock said during its fourth quarter earnings call that they plan on repurchasing at least $1.5 billion worth of shares during 2023.
In 2022, BlackRock returned $1.9 billion to shareholders in share repurchases despite the market turbulence.
If it doesn’t do substantial M&A, BlackRock could potentially buy more shares if its stock goes down far enough and that could help the company reduce its float further.
Valuation
With occasional exceptions, BlackRock has had a P/E ratio of over 15 since 2014.
With its current P/E ratio, it seems that BlackRock is trading around its historical average which is a fair valuation and not a cheap valuation. Given BlackRock has a great business, however, the valuation is still pretty good for the long term.
In terms of analyst estimates, analysts see the company earning $35.09 per share for fiscal period ending December 2023, and $39.95 per share for fiscal period ending December 2024, which would give it a forward P/E ratio of 18.14 and 15.94 for those fiscal years, respectively.
Based on forward P/E, BlackRock is again trading at a pretty fair valuation given the historical P/E averages.
Recession Odds
In terms of earnings estimates for fiscal year 2023, BlackRock could have a tough time meeting estimates if there is a severe enough recession.
There could be tougher rules and more regulation as a result of the failure of Silicon Valley Bank, and as a result, some banks might need to retain more capital.
If banks have to retain more capital, they might not make as many loans. This could slow the economy which is already slowing with the interest rate increases.
Given the changes, Goldman Sachs recently increased the odds of a recession to 35% in the next 12 months, up from 25% in the past.
If a recession causes the broader markets to decline, BlackRock stock has near term downside risk.
Risks
Buying a company in financial trouble has risk. Bank of America (BAC) bought Countrywide Financial in 2008 in what seemed like a good valuation for the acquirer. Given all the losses since the acquisition, however, the deal was terrible for Bank of America. BlackRock could buy the wrong company or asset that destroys value whether that’s listed or in bankruptcy.
The U.S. government has in the past gotten together the heads of major financial institutions during the financial crisis and asked for institutions to help. Any sort of deal could be a headwind in the near term depending on the conditions before potentially adding value in the long term.
If the economy slows far enough, BlackRock’s earnings could decrease and the company’s stock could have near-term risk.
If interest rates go up higher, the financial system could face even more stress.
If more banks go under, the financial system could face stress.
If the financial stocks sell off given more financial system stress, BlackRock’s stock could have near term downside.
Conclusion
With the market turbulence, many financial stocks trade for lower valuations and BlackRock has M&A opportunity given its strong balance sheet. BlackRock has done successful M&A in the past with the purchase of BGI from Barclays.
Given the increasing signs of financial system stress and the rising potential for a recession, BlackRock has near term downside risks.
Given the company’s history of net inflows and its strong margins, however, BlackRock has a great business and is a buy for the long term. Not only does BlackRock have a leading asset management business but also the company has a growing fintech business in Aladdin where 2022 full year sales rose 7% year over year to $1.4 billion.
Currently, BlackRock, Inc. stock is trading at a fair valuation. If there is a dip of another 10-20% which is possible given the potential headwinds, BlackRock, Inc. would trade at a cheap valuation and be a better buy.
