BlackRock Still Growing Despite Difficult Landscape

Wells Fargo cut its EPS estimate of BlackRock, Inc. BLK, saying the company’s core performance in the third quarter fell short of its expectations.

The company’s third quarter adjusted EPS of $5.14 is above both the consensus $(5.00) and Wells Fargo estimate $(5.06). However, revenue and operating results fell short but were more than offset by favorable variances for non-operating income and tax.

HThe brokerage cut its 2016 EPS estimate to $19.21 from $19.25, and 2017 estimate to $22.00 from $22.40.

That said, Wells Fargo maintained its Market Perform rating and valuation range of $340-$370, citing the shares are fairly valued.

“Positively, BLK effectively managed expenses, leading to the highest operating margin in over a year. Negatively, the average fee rate declined by more than we had expected, and an additional step-down in 4Q seems likely following recent price cuts on certain exchange-traded funds (ETFs) and fixed-income mutual funds,” analyst Christopher Harris wrote in a note.

Meanwhile, the company generated S55.2 billion of third quarter long-term inflows (just above Wells Fargo estimate of S54.4 billion), which underscores the power of BlackRock’s breadth of product and global operations.

In addition, Harris noted that BlackRock is well set for the Department of Labor fiduciary rule (first implementation in April 2017). The company still believes the rule to increase demand for asset allocation strategies (managed portfolios) and ETFs at the expense of active funds. On the flip side, the rule would pressure BlackRock’s own economics with distribution partners.

“Given BLK's significant product depth across many strategies including ETFs, the firm seems to be among the best positioned asset managers to handle the rule's impact,” Harris highlighted.

At time of writing, shares of BlackRock were down 0.82 percent to $353.65.