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BlackRock’s A Little Too High

BlackRock (BLK) announced 2015 Q1 profit growth of 10% on just a 2% rise in revenue. Unfortunately, proofits are expected to be down 1% and down 2% the next two quarters, and that will likely keep the stock in check for a bit.

The good news of the qtr is the company brought in $70 billion in assets — $250 billion in new business during the last 12 months — and is growing around 5% a year organically. Employee payroll was flat year-over-year even though the company increased headcount as the strong dollar helped cut this figure, which helped profits grow faster than sales.

BlackRock has a $61 billion market cap and bought back $275 million in stock last quarter. On an annual basis that equates to the company buying back 2% of shares.

The firm’s iShares, purchased in 2009, kicked in 30% of firm revenue and brought in half the $70 billion in new money, but it is also one of the least profitable divisions in terms of percentage of fees to assets. ETFs are a low fee business, with stock portfolio management being the highest. BlackRock controls 40% of the ETF market.

One Year Chart

BLK_2015_Q2Since October BLK’s P/E has risen from 15 to 18. All this despite sub par profit growth. Estimates of -1% and -2% profit growth should hold back the stock, but BLK just beat estimates by 35 cents last qtr and has beaten by a good margin in three of the last four quarters, so these estimates could be low.

BlackRock also pays a dividend of around 2%. Add that to the estimated long-term profit growth rate of 12% and you get a possible annual return of 14% per year.

Fair Value

BLK_2015_Q2_FV Since the company is in a slow-growth period I think the stock’s only worth 16 times earnings, down from the 18 I thought it was worth last July. The market seems to think even with the lackluster profit growth that a 18 P/E is what the stock’s worth. BLK is currently a little overvalued in my eyes.

Sharek’s Take

The trouble with BlackRock is the same issue that plagues many of the stocks in the market today — it’s just a little too high. If BLK were growing profits 15% this year then I feel it would be worth 18 times earnings. But single-digit growth is what the company is probably delivering this year, and that means 16x earnings is reasonable. To me this $368 stock is worth $325 and I’d like to wait for a better entry point to buy in. If you already own the stock continue to hold it.

View the Earnings Table here.
View the Profit History here.
View the Ten Year Chart here.

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