Is BlackRock Stock A Sell Before Earnings? Consider Potential EPS Miss And Valuations

Elevator Pitch

I assign a Hold investment rating to BlackRock, Inc.’s (NYSE:BLK) shares. BLK might disappoint investors with earnings that fall short of market expectations when it releases its Q3 2022 financial results this week. But the downside for BlackRock’s stock should be limited by the fact that BLK is at a fair valuation and its growth outlook for the long run is reasonably good. In consideration of these factors, a Neutral or Hold rating for BLK is justified.

BLK Stock Key Metrics

BlackRock is referred to as “the world’s largest asset manager” in a recent Reuters news article published at the end of September 2022. On its iShares ETF platform website, BLK also highlights that it is “the largest provider of exchange-traded-funds” or ETFs globally.

Prior to previewing BlackRock’s upcoming quarterly financial performance, it is necessary to review key metrics such as the change in Wall Street’s consensus earnings forecasts and target prices.

According to S&P Capital IQ data, the mean sell-side price target for BLK was cut by -22% from $1,005.46 as of December 31, 2021 to $778.83 as of mid-2022. Between June 30, 2022 and October 7, 2022, Blackrock’s average consensus target price was reduced by another -10% to $700.75.

The analysts have also revised their financial projections for BlackRock downwards in recent times. BLK’s consensus normalized earnings per share or EPS for full-year fiscal 2022 and Q3 2022 were adjusted down by -2.1% and -4.6%, respectively in the last three months. Also, it must be noted that the majority, or nine out of the 13 Wall Street analysts covering BLK’s stock, lowered their respective third-quarter bottom line estimates for the company in the past three months.

The key metrics for BlackRock outlined above suggests that the market has a reasonably dim view of BLK’s stock price performance and financial results in the short term.

Is BlackRock Expected To Beat Earnings?

BlackRock had announced previously on September 29, 2022, that the company will release its financial results for the third quarter of 2022 on October 13, 2022 before trading hours.

I don’t expect BLK to beat market expectations with the company’s upcoming Q3 2022 earnings announcement.

The sell-side’s consensus normalized EPS forecast for BlackRock is $7.73 as per financial data sourced from S&P Capital IQ. This implies that Wall Street analysts hold the view that BLK will reverse from a +18.8% YoY bottom line expansion in Q3 2021 to a -29.4% YoY EPS contraction for Q3 2022.

Nevertheless, I think that the market is a tad too optimistic about BLK’s Q3 2022 financial performance. The third-quarter consensus bottom line estimate of $7.73 suggests that BlackRock’s YoY EPS decline (-29.4%) for Q3 will only worsen slightly as compared to the -26.6% YoY fall in its Q2 2022 bottom line. Moreover, the Q3 2022 consensus EPS forecast of $7.73 is equivalent to a QoQ growth of +5% over BLK’s actual Q2 2022 normalized EPS of $7.36.

A September 30, 2022 research report published by State Street Global Advisors titled “US-Listed Monthly Flash Flows: The Longest Mile” found that “ETFs posted below average flows” in September with just half (versus historical average of 63%) of ETFs seeing inflows in the last one month. Deteriorating flows don’t give me much confidence in BlackRock’s third-quarter results.

Furthermore, BlackRock’s near-term profitability outlook isn’t great. The company’s profit margins in the short term should likely be hit by negative operating leverage and inflationary cost pressures.

Separately, while BLK mentioned at its prior Q2 2022 earnings call that it will be “proactively managing the pace of” its “discretionary investments”, the company emphasized that these initiatives “will not materially impact our 2022 results.” As such, BlackRock’s Q3 2022 profitability won’t get a boost from the company’s plans to optimize expenses.

In a nutshell, I think that a Q3 earnings miss for BlackRock is on the cards.

How Much Is BlackRock Worth As A Company?

The sell-side analysts are of the opinion that BlackRock is worth $700.75 apiece as per BLK’s consensus price target shared earlier in a prior section of this article.

In other words, Wall Street sees BlackRock’s stock price rising by as much as +27% as compared to the company’s last done share price of $550.40 as of October 7, 2022.

I don’t see BlackRock’s valuations as being very demanding. However, I don’t share the analysts’ view that BLK’s shares are undervalued to such a large extent as detailed in the next section.

Is BlackRock Stock Overvalued?

I deem BlackRock’s stock to be fairly valued, rather than being overvalued or undervalued (as per the sell-side’s consensus target price mentioned in the previous section).

The market currently values BlackRock at 16.7 times consensus forward next twelve months’ normalized P/E as per S&P Capital IQ’s valuation data.

BLK’s current earnings multiple appears to be fair, as this is largely aligned with the company’s consensus EPS growth in the low-teens percentage and ROEs in the mid-teens percentage for FY 2023 and FY 2023.

What Is BlackRock’s Long-Term Outlook?

In the long term, BlackRock’s technology platform business, Aladdin, holds the greatest potential for growth.

BLK defines Aladdin as “a central processing system for investment management” which “integrates and connects functions” like “portfolio management and trading to compliance, operations, and risk oversight” on the company’s website.

BlackRock revealed at the company’s earlier Investor Day in June 2021 that Aladdin has delivered excellent growth historically, boasting an annual top line expansion in the “low-to-mid teens” percentage level since 2016.

Looking ahead, BLK estimates that Aladdin has only penetrated roughly one-tenth of the $10 billion addressable market for the business. Future growth for Aladdin (and BlackRock) will be driven by a broadening of its sales coverage to target small-to-medium sized investment managers.

In summary, I have a positive view of BlackRock’s long-term outlook, with expectations that Aladdin will be the key driver.

Is BLK Stock A Buy, Sell, or Hold?

I have BLK stock rated as a Hold. I see BlackRock announcing below-expectations Q3 2022 earnings this week. But BLK’s valuations aren’t expensive and are largely in line with the company’s intermediate-term financial metrics such as ROEs and bottom line growth. Therefore, I rate BlackRock as a Hold, instead of a Sell.