CA - Blackstone Stock Q3: Should You Buy The Dip?

2023-10-20 15:31:31 ET

Summary

• We rated Blackstone Inc. a Sell in late September due to its valuation getting too rich relative to the headwinds it was facing.
• These headwinds became evident to the market when Blackstone reported disappointing Q3 results, sending the stock sharply lower.
• We reevaluate our Sell rating by taking the lower stock price and Q3 results into consideration.

Blackstone Inc. ( BX ) just reported Q3 results, and the market clearly frowned on them, sending the stock down sharply:

As a result, our sell call back on September 26th proved to be correct. In this article, we will revisit our reasons for rating BX stock a sell, analyze their latest quarterly results, and then share our updated rating on the stock.

Why we rated BX stock a sell

Blackstone has delivered impressive total returns for its shareholders over the years and now boasts a whopping $1 trillion in assets under management, making it the world's largest alternative asset manager. Blackstone's vast presence in sectors like private equity, direct lending/private credit, real estate, and infrastructure has provided it with significant competitive advantages, including:

• economies of scale
• a low cost of capital
• a strong brand reputation.

However, despite these strengths, there were three primary reasons why we rated BX stock a Sell back on September 26th:

1. Macroeconomic and Geopolitical Concerns: Blackstone's success has been fueled by favorable capital market conditions, historically low interest rates, and a booming global economy alongside relative global peace and stability. These factors have driven much of its growth. However, these tailwinds are showing signs of waning as interest rates have been on the rise, leading to its real estate and private equity holdings beginning to face valuation challenges due to rising interest rates. Additionally, the global economy is grappling with challenges, including economic difficulties in Europe and China, and geopolitical tensions, such as the Russia-Ukraine and Israel-Hamas conflicts along with potential conflicts in East Asia.

2. Valuation Concerns: BX's valuation metrics had reached rather elevated levels compared to its historical averages. When combined with rising interest rates and growing macro headwinds, this made the risk-reward unappealing.

3. Attractive Valuations of Peers: Finally, some of Blackstone's peers - such as Brookfield Asset Management ( BAM ) and Blue Owl ( OWL ) - appeared to be more attractively valued at the time.

Blackstone's Q3 Results

In its third quarter, BX reported distributable earnings of $0.94 per common share along with a dividend of $0.80 per share. Management noted that the third quarter witnessed significant volatility in global markets - particularly with a notable increase in bond yields, declines in major equity indices, and other macro factors such as growing economic uncertainties, geopolitical turbulence, labor unrest, and overall worsening investor sentiment. However, despite these challenges, Blackstone's diverse investment strategies enabled it to generate stable performance and remain well-positioned to continue its AUM growth moving forward. As CEO Stephen Schwarzman pointed out on the earnings call:

The third quarter of 2023 was a volatile period for global markets...The investment performance we've consistently produced over decades has created a huge reservoir of goodwill with our customers, allowing us to grow even in difficult periods.

Specifically, Blackstone's real estate holdings in logistics, data centers, and student housing continued to show robust underlying performance as its data center business - QTS - experienced significant growth driven by a surge in data demand. That said, management noted that rapidly rising long-term interest rates are undoubtedly posing challenges to real estate valuation multiples.

Valuation headwinds notwithstanding, BX's funds overall still generated positive appreciation during Q3, outperforming most major market indices. This was particularly the case in its private credit, infrastructure, and life sciences funds.

Updating Our Rating

Overall, BX's Q3 results were pretty solid and certainly did nothing to shake investor confidence in the company's long-term trajectory as a growing and leading alternative asset manager:

1. It continued to generate attractive returns for its clients across its well-diversified strategies despite growing headwinds and poor public market index returns during the quarter.
2. Moreover, it remains a global leader in real estate investing with resilient performance across its logistics, data centers, and student housing strategies.
3. Additionally, its diverse offering of over 70 distinct investment strategies positions the firm well to navigate any market environment by allowing the firm to pivot to areas with the greatest opportunities at different points in the market cycle, while also offering clients well-diversified portfolios. BX's private credit business is doing particularly well right now and is driving much of its growth.

4. BX is well-prepared to capitalize on any opportunities that may emerge from the current macroeconomic and geopolitical turmoil with over $200 billion of dry powder across its various strategies.

5. It is competitively positioned to react in near real-time to evolving economic conditions as its global scale and over $1 trillion in AUM provide it with deep insights.

As a result, BX remains optimistic about its future growth prospects and believes it is well-positioned to capture growth opportunities in the alternative assets arena for many years to come.

That said, to paint a rosy picture for BX would be doing a disservice to investors as the company also faces significant headwinds that were evidenced in its Q3 earnings miss. Some of these headwinds include:

1. Volatility in global markets, including a significant increase in bond yields that are weighing on BX's fundraising efforts as well as returns within its funds. Management even acknowledged that it has a view that the Federal Reserve will maintain higher rates for a protracted period in an effort to stamp out sticky inflation. This could mean that BX will generate slower than expected AUM growth for the foreseeable future.

2. Moreover, the economic uncertainties, geopolitical turbulence, and other macroeconomic factors that we cited as headwinds back in September have only increased since then with long-term treasury yields rising and war erupting in the Middle East.

Investor Takeaway

BX's valuation got way ahead of itself in late September - especially given its growing headwinds - warranting a Sell rating on the stock. Now that its Q3 results have made this new reality clear to the market, the stock has pulled back sharply, removing much of this premium.

Looking at its current fundamentals, BX remains well-positioned for long-term growth and remaining a leading alternative asset manager for decades to come. It should weather any economic storms that come its way better than many of its competitors and has many levers to pull to help drive further fee-based earnings growth.

That said, growth will likely slow meaningfully in the coming years. Moreover, its P/DE ratio of 20.4x and NTM dividend yield of 4.2% indicate that BX stock is still priced at a slight premium to its five-year averages of 30.3x and 4.5%, respectively. As a result, while we no longer believe that Blackstone Inc. stock warrants a Sell rating, we are only upgrading it to a Hold, as we do not see it as being discounted enough to warrant a Buy at these levels.

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