Stephen Biggar is a member of Investment Policy Committee and Senior Portfolio Group at Argus Research, a leading independent Wall Street research firm. Here, he updates his outlook on two leading bank stocks.
BlackRock (BLK) provides investment management, risk management, and advisory services for institutional and retail clients worldwide.
Its range of products includes separate accounts, mutual funds, the iShares franchise of ETFs, and other pooled investment vehicles. Assets under management were $9.57 trillion as of March 31, 2022.
With some $3.2 trillion in ETF assets under management, BlackRock’s franchise is the largest ETF provider, well ahead of second-place Vanguard. The iShares franchise has allowed the company to dominate the ETF market, with strong organic growth in the U.S. and Europe over the past year.
This large scale helped the company to boost its operating margin from 39.3% in 2010 to 44.9% in 2020. The 2021 margin was a weaker 38.5% amid cost pressures. BlackRock sees the global ETF market increasing from $8 trillion in assets in 2020 to $15 trillion by 2025.
On April 13, BlackRock reported 1Q22 adjusted earnings of $9.35 per share, up from $7.77 a year earlier and above the consensus of $8.84. Revenue rose 7% to $4.7 billion, led by growth in investment advisory and distribution fees. Total AUM at March 31, 2022 rose 6% from the prior year to $9.57 trillion.
BlackRock has generally seen long-term inflows in a wide variety of market environments. We believe that this reflects the company’s strong diversification across product lines. The company is targeting long-term AUM growth of 5% annually.
On valuation, we believe that BLK shares should trade at a premium to large-cap financial stocks given the company’s above-average operating margins, stable long-term asset inflows, and history of product innovation. Our target price of $975 assumes a multiple of 21-times our 2023 EPS estimate, a historical premium that we believe is merited by the company’s high operating margins, which are generally in the mid- to high 40s.
We believe that State Street Corp. (STT) is doing a good job managing the shift from active to passive money management, which has created fee pressure and increased competition. In a challenging revenue environment, the company is working to control costs, and we look for well-contained expenses to continue in 2022.
The company’s 1Q22 results showed growth in most fee-based revenue categories as well as in net interest income. The latter should remain a strong tailwind in 2022 as the Fed raises interest rates. State Street will add $5.4 trillion in assets under custody through the forthcoming acquisition of Brown Brothers Harriman Investor Services.
We expect State Street to benefit from several long-term earnings drivers. First, asset managers are facing cost pressures that will likely lead to the further outsourcing of back-office operations. Second, the company has scale advantages, and should see improved operating leverage over time. Third, asset managers must focus on their core competency (managing money) and not on more-mundane servicing tasks.
Low interest rates have hurt net interest income over the past two years; however, rising rates should provide a tailwind for net interest income this year. Over the long term, we expect the company to benefit from industry consolidation that favors the most efficient players.
STT has historically traded at a premium to the S&P 500, but now trades at just 10-times our 2022 EPS estimate. We believe that recent weakness provides a favorable entry point for the high-quality STT shares, which trade at just 10-times our 2022 EPS estimate and yield about 3.0%. We are raising our rating to "buy" with a target price of $93.