Blackrock posts underwhelming profit, but there's plenty more where that came from


Blackrock posts underwhelming profit, but there's plenty more where that came from

Julian Close 10/28/2013

Blackrock Financial Management ( BLK ) is the world's largest asset manager, and a tremendously powerful, respected name in financial circles, despite being a far younger company than most of the big name Wall Street firms. The company's cache springs in part from a $130 billion contract it acquired in 2009; the customer was the Federal Reserve Bank of New York, which hired Blackrock to price and liquidate distressed financial assets after the 2008 sub-prime mortgage crisis. These included not only mortgage backed securities, but several subsidiaries of AIG as well.

Blackrock has had an impressive year, and BLK stock has risen 70% over the past twelve months. Its record of strong growth, rising dividends and high profit margins (currently 28%) contribute to the stock's five STARS (strong buy) rating from S&P, and while S&P has no cause to complain about Blackrock's performance, the stock may have given them a brief scare recently.

On October 16, while the world was riveted by the political crisis and fretting over the possibility of the U.S. defaulting on its debt and causing a global financial meltdown, Blackrock reported third quarter earnings of $3.88 on an adjusted basis, which was two cents below S&P's estimate and one cent below the Capital IQ consensus estimate. The Street often reacts harshly and a bit vindictively when companies miss their earnings targets, and the news must initially have seemed worrying.

It was not long, however, before it became clear that The Street was viewing the report positively. Not only was S&P's estimate among the highest, but other ratings agencies, Thomson Reuters in particular, had calculated the consensus estimate to be $3.88, so the story that investors heard that morning (the few who were paying attention, that is) was that Blackrock had hit its earnings target. From The Street's perspective, a miss is just a miss, but when there is a close call, it shifts the weight of investor attention onto the remainder of the report, and beyond the initial number, Blackrock's third quarter earnings report was a strong one.

Assets under management grew 12% from the year-ago quarter. Revenue rose by 7% over the same period. Continuing efforts at cost control had led to the company's highest profit margin in five years, and its iShares ETFs continued to grow more and more popular. In light of Blackrock's $4.1 trillion under management and the company's growth across all business units, it is no wonder that investors took the earnings near-miss as an all-round positive, and chose to buy rather than sell.

Given the rising interest in ETFs in general and Blackrock's ETFs in particular, the company's peerless reputation, its magnificent profit margin and a management team that has demonstrated extreme competence, the chance of any significant, near-term drop in the price of BLK shares appears remote.

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I seek to capitalize on the strength of Blackrock with a bull-put credit spread. Look at the January 250/260 bull-put spread for at least an $0.65 credit. Use limit orders. This trade has a target return of 7% over 82 days, which is an annualized return of 31%, (for comparison purposes only). The stock has to fall 15% to cause a problem. Be aware that this is an aggressive trade, best undertaken by investors with diverse portfolios and high tolerance for risk.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on

This article appears in: Investing , Options

Referenced Stocks: BLK



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