(By Mani) BlackRock, Inc. (NYSE: BLK), the world's largest money manager with $3.5 trillion in assets, has multiple growth opportunities that would boost its asset base and ultimately growing its earnings faster.
BlackRock offers its money-management services through a variety of funding vehicles, including actively managed retail mutual funds; index funds and its signature ishares ETFs; institutional separate accounts, alternative-investment-management funding vehicles such as hedge funds and fund of funds; and cash-management products.
BlackRock focuses on solutions-oriented approach – helping clients solve investment problems rather than simply pitching them on products – a strategic imperative for the company.
"We believe BlackRock is further along than any of its competitors in developing this concept of solutions-oriented money management. As a result, we think that over time BlackRock's net flows (organic growth), its increase in assets under management, and, ultimately, its earnings growth will be greater than that of competitors," RBC Capital Markets analyst Eric Berg wrote in a note to clients.
Berg sees BlackRock increasing its total assets under management (AUM) to increase $3.7 trillion in 2012 and $4.1 trillion in 2013 from $3.5 trillion in 2011, mainly driven by a continued increase in assets within the iShares business.
Further, BlackRock has multiple growth opportunities outside of providing solutions to clients. These include its ETF and index products, alternative investment products, and retirement income management.
BlackRock's 2009 acquisition of Barclays Global Investors, or BGI, the ETF platform of Barclays Bank, more than doubled BlackRock's asset base from $1.3 trillion to $3.2 trillion. The acquisition also positioned BlackRock as the leader in passive investing, with a market share in ETFs of about 42 percent.
In 2011, BlackRock added a suite of retail-oriented alternative-investment mutual funds. The firm's market share across the various sub-categories of alternative investments – private equity, hedge funds, real estate, and fund of hedge funds – is in the low-single-digit range.
"Even if BlackRock doesn't take share in alternative investing, the fact that the industry growth is so rapid for certain types of alternatives, such as the mutual funds backed by alternative investments, bodes well for BlackRock's fees in this business," Berg said.
Moreover, BlackRock is now setting its sights on what could be an even bigger market with greater growth prospects than 401K, namely, the income market. This is the business of providing income-oriented solutions to individuals already in retirement.
"With interest rates as low as they are, with lifespans advancing as rapidly as they are, and with pressure on governments everywhere to raise the age to qualify for Social Security and similar benefits abroad, the need for retirees to generate their own income has never been greater," the analyst said.
In the last two years, BlackRock has launched no fewer than seven new income-oriented funds, including a new high-dividend ETF.
Meanwhile, asset managers everywhere have been facing a pincer on profit margins – rising costs and pressure on fee revenues. BlackRock has been no exception. The company has been spending heavily on new-product initiatives and technology, and it has seen its average fee levels come down as ETFs and index products accounted heavily in its asset mix.
Of note, however, BlackRock's profit margins have been very steady. Some of this has to do with the fact that the ETF business is highly scaleable, meaning the profit margins on the business actually improve as the asset base in an ETF grows.
"But BlackRock's stable profit margins, including in periods when the United States has been in recession, are also a reflection of the company's ongoing program to lower costs," Berg noted.
On the cash flow front, BlackRock generates cash flow from operations that actually often exceeds its GAAP net income. That was the case in 2011, when GAAP net income, as adjusted, was equal to about $2.2 billion, and cash flow from operations came in greater at $2.6 billion.
The reason is simple as money managers does not have to spend heavily on factories, equipment and other capital expenditures, as well as the absence of heavy loads from receivables.
"This strong cash flow, which typically does not have to be reinvested heavily into the business save for expenditures on branding and information technology, results in an ability by BlackRock to return capital to shareholders that can be quite meaningful," the analyst added.