Wednesday, March 17, 2010

Upgrading to Outperform Blackrock $BLK [credit suisse equity research]

Upgrading to Outperform

■Upgrading to Outperform from Neutral: Underperformance in the BLK stock and improved relative valuation, provides an entry point to leverage the strongest secular drivers of organic AuM growth – ETF strategies, payout market, and international distribution. More importantly, we expect strong EPS and flows to drive stock price outperformance over the intermediate term, and believe the stock is fully embedding the seasonal issues that impact 1Q flows (ETFs and money market funds) and the risk to quantitative flows in ‘10. We are raising our 2011 EPS estimate to $13.50 from $13.30 vs. $13.22 for consensus. Our DCF-derived target price increases to $280 (32% upside).

■Outperform Thesis: We estimate stronger earnings/accretion from BGI will drive a modest EPS beat in 1Q10, and help offset weaker flows q/q. However, we look for strong flows in 2Q to lift the BLK stock, and EPS above consensus (‘10 EPS = 11.36 vs. 11.19). We also believe BLK is bestpositioned to benefit from 3 of the 4 secular drivers of AuM growth, which are (1) ETF products, (2) payout market (retirees in US and Western Europe), (3) international distribution. One area that BLK can upgrade is its retail distribution in non-Japan Asia and LATAM (growing emerging market middle class is fourth secular driver). Risks to the BLK stock are (1) greater than expected money market fund and quantitative outflows in ‘10, (2) low performance fees in real estate, and (3) a decline in short-term solution assignments (like Bear Stearns, AIG mandates).

■ Catalysts: While the SimFund / AMG data releases provide new data points for BLK’s US fund flows (especially money market), we view the 1Q and 2Q earnings releases (in late April and late July) as the next key catalysts. Due to the seasonality of 1Q flows, we estimate 2Q represents the next allaround strong quarter for BLK.

Black Rock

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