The worldʻs largest asset manager, BlackRock (BLK 0.62%) has seen its stock price plummet 27% year to date, and since it closed at over $971 per share last November, it has lost nearly one-third of its value.
With the stock market down significantly this year, BlackRock saw its assets under management decline about 4% in the latest quarter to $9.6 trillion and revenue fall about 7.8% from the previous quarter. However, the numbers are up year over year, and BlackRock beat earnings estimates with $1.4 billion in net income, up 18% compared to the first quarter of 2021.
With the drop in price, is BlackRock, which manages the iShares line of exchange-traded funds (ETFs), undervalued? And is it a buy?
Metrics indicate a declining valuation for BlackRock
Despite the market correction in the first quarter, BlackRock had positive net flows into its funds, although they were down sequentially and year over year. BlackRock saw $86 billion flow into its funds, down from $212 billion in Q4 and $172 billion in the first quarter of 2021. Long-term funds had $114 billion in net flows in the quarter, but BlackRock had $27 billion in money market outflows, driven by a rise in redemptions.
Its valuation metrics have all come down. BlackRockʻs forward price-to-earnings (P/E) ratio is about 15, below both the Dow Jones Industrial Average of 18 and the S&P 500 average of 21.7 as of June 8. The P/E-to-growth (PEG) ratio, which charts stock price in relation to future growth expectations, is just above 1, which indicates that the stock is well valued compared to its future growth expectations. A PEG under 1 indicates an undervalued stock. A year ago, BlackRockʻs PEG ratio was right around 2.
The price-to-book (P/B) ratio is 2.4, which is down from 3.8 at the end of June 2021. In addition, its return on equity (ROE) is a robust 16.7%, up from about 15% a year ago. This means that the company is generating more income from its equity. Further, a rising ROE and falling P/B generally indicate a company that is undervalued.
Another number to look at is debt-to-equity, which is about 0.2, which is very low. A debt-to-equity ratio over 1 means the company is using more debt to fund its assets, while a ratio under 1 means it is using less debt to fund operations.
Is BlackRock stock undervalued?
BlackRock is the leader in the fastest-growing segment of the market, ETFs, which are projected to grow from about $10 trillion in worldwide assets today to $50 trillion by 2030. BlackRockʻs iShares funds have a leading market share of 34%, while the top three players control 80% of the ETF market. So, there is huge growth potential there, as well as with environmental, social, and governance (ESG) investing -- which BlackRock has also staked out a leading position in.
But, as an asset manager, BlackRock performs better when markets are up. When markets are down 10% to 20%, then assets will be down, which means that fees will also be down, as they are generally based on assets under management. The outlook for the rest of the year has the S&P 500 at about 4,400 -- which is down for the year as it ended 2021 at just under 4,800. However, if the S&P 500 does close the year at 4,400, thatʻs up about 7% from the current level.
Long term, BlackRock is a great stock and is about as cheap as it has been in a while. It looks like a good buy at this valuation, particularly if the market is coming up from the bottom -- as analysts project.
Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Certainly, let's dive into the concepts within the article about BlackRock.
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Stock Price Performance: BlackRock's stock has decreased by 27% year to date, which is a significant decline. This decline is a key indicator of the company's market performance and investor sentiment.
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Assets Under Management (AUM): BlackRock's AUM has experienced a 4% decline in the latest quarter, amounting to $9.6 trillion. However, it's essential to note that this figure is up year over year.
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Revenue and Earnings: Despite the decline in AUM and a 7.8% fall in revenue from the previous quarter, BlackRock surpassed earnings estimates with $1.4 billion in net income, marking an 18% increase compared to the first quarter of the previous year.
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Fund Flows: The article mentions positive net flows of $86 billion into BlackRock's funds, though this figure is down from the previous quarters. Long-term funds had $114 billion in net flows, but money market outflows of $27 billion occurred due to increased redemptions.
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Valuation Metrics: Several valuation metrics indicate a decline in BlackRock's valuation. The forward Price-to-Earnings (P/E) ratio stands at about 15, lower than the Dow Jones Industrial Average and the S&P 500 average. The P/E-to-Growth (PEG) ratio is slightly above 1, suggesting a well-valued stock concerning future growth expectations. A year ago, the PEG ratio was around 2. The Price-to-Book (P/B) ratio is 2.4, down from 3.8 a year ago. A rising Return on Equity (ROE) of 16.7% indicates the company's improved income generation from its equity.
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Debt-to-Equity Ratio: BlackRock's debt-to-equity ratio is approximately 0.2, signaling a very low reliance on debt to fund its operations.
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ETF Market Leadership: BlackRock holds a dominant position in the ETF market with its iShares funds commanding a 34% market share, contributing to its growth potential.
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Market Performance Impact: BlackRock's performance is influenced by market conditions; a downturn affects its assets and subsequently fees since they're tied to assets under management.
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Growth Potential and ESG Investing: BlackRock's strength lies in the rapidly growing ETF market, forecasted to reach $50 trillion by 2030. Additionally, the company has a strong foothold in Environmental, Social, and Governance (ESG) investing, which also presents growth opportunities.
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Market Outlook and Analyst Projections: Analysts foresee a positive outlook if the S&P 500 reaches 4,400 by the year-end, projecting a potential 7% increase from the current level.
In conclusion, despite BlackRock's recent stock decline, various valuation metrics and its position in the growing ETF and ESG sectors suggest a potential undervaluation. Long-term prospects appear promising, especially if market conditions improve.
