Summary
- BlackRock delivered a robust Q4 earnings release, demonstrating the strength and resilience of its asset management model in one of the most challenging market environments last year.
- Savvy investors have already picked its pessimistic bottom in October, as BLK outperformed the S&P 500 significantly. Investors who wait for the good news first are often too late.
- At an NTM P/E of more than 21x, the reward/risk doesn't look attractive. So be patient and wait for a deeper pullback.
When you are the world's leading asset manager like BlackRock, Inc. ( BLK ), you will have significant clout in attracting net flows as the market recovers.
Accordingly, BLK has continued to outperform the S&P 500 ( SPX ) ( SPY ) since our Strong Buy rating in October 2022, posting a return of nearly 30%. However, BLK's upward momentum has also stalled since we downgraded it to a Hold in early November 2022. Accordingly, BLK pulled back nearly 13% from its November highs toward its December lows.
Notwithstanding, BLK has recovered remarkably well from those lows (pre-earnings) as the market recovered. So by the time you wait until its robust Q4 and FY22 earnings release, BLK has already moved back close to its key resistance levels.
BLK last traded at an NTM earnings multiple of 22.4x, well above its 10Y average of 17.8x and its peers' median of 13.7x. BLK bulls could argue that the asset manager could continue to post solid earnings growth through FY24 if the broad market recovers, improving its valuations further. That view is in line with the consensus estimates.
Accordingly, Wall Street analysts expect BlackRock's adjusted EPS to increase by 12.7% in 2024 after a slight increase in 2023 (up 1.9%). As such, BLK's implied FY24 earnings multiple of 19x suggests it should normalize closer to its 10Y average but still markedly above.
Therefore, investors need to consider whether such optimism has been priced in as the market looks ahead.
Notably, management highlighted in the earnings conference call that it expects a market recovery to drive further growth in its ETFs. Accordingly, BlackRock posted Q4 long-term net inflows of $146B, driving its full-year long-term net inflows of $393B.
Notably, its "industry-leading ETF net inflows" totaled $220B in FY22, as investors' appetite for BlackRock's ETFs remains resilient.
The company also saw broad-based growth across its ETF categories and posted significant strength in iShares bond ETFs, as it drove $123B in net inflows. As such, the company also highlighted how active bond ETFs investors capitalized on the company's broad offering across "duration, convexity, and credit exposures."
As such, despite the historic obliteration of the 60/40 portfolio in 2022, BlackRock's value proposition driving net inflows has demonstrated its competitive moat that's difficult to surpass. We believe the bear market and record Fed rate hikes in 2022 have put BlackRock's business model to the test, and CEO Larry Fink & team has delivered tremendously well.
The Fed will likely be moving into the "data-dependency" phase this year even as they have yet to signal the loosening of financial conditions . Despite that, market participants have already anticipated easing moving ahead , suggesting that potentially weak economic outlook/recessionary conditions could weaken the Fed's resolve to keep its rates higher for longer .
As such, BLK investors need to assess whether they anticipate a sustained SPX recovery or expect further destruction due to a worse-than-expected recession .
Recent results from America's leading banking institutions suggest that a steep recession is likely not on the cards, even though they raised their loan loss reserves to reflect higher credit risk estimates. Despite that, the American consumer remains resilient, lifted by the strong jobs market , suggesting that companies have continued to invest in the workforce.
As such, we believe BLK's October lows have likely contemplated a mild-to-moderate recession and not a deep one. Despite the economic doom and gloom headlines, we don't expect its October lows to be retaken.
But, the critical question is whether the reward/risk profile for BLK still makes sense at the current levels after a spectacular run from its October bottom?
BLK price chart (weekly) (TradingView)
Our analysis suggests that BLK's near-term upside looks limited relative to a potential pullback risk, as its upward momentum has continued to face resistance at its November highs.
Coupled with an above-average valuation, we encourage investors to consider waiting patiently on the sidelines first, as Powell and his FOMC colleagues could still pull off a stunner , despite the market's more sanguine positioning.
Rating: Hold (Reiterated).
For further details see:
BlackRock: Rocky Valuations Better To Avoid