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Will Higher Costs Hamper BlackRock (BLK) Q3 Earnings?

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BlackRock, Inc.BLK is scheduled to report its third-quarter 2015 results on Oct 14, before the market opens.

Last quarter, adjusted earnings per share outpaced the Zacks Consensus Estimate. Results were aided by a rise in revenues, partially offset by higher expenses.

BlackRock recorded an earnings beat in all the trailing four quarters with an average surprise of 6.58%.

However, will BlackRock miss on earnings this quarter? Let's see how things have shaped up for this announcement.

Factors Influencing Q3 Results

BlackRock's profitability remains challenged by a persistent rise in adjusted operating expenses at a CAGR of 4.6% over the last 4 years with the trend continued in the first six months of 2015 as well. The pressure is expected to continue in the current quarter with management predicting an increase in general and administrative expenses.

Though fee income is expected to grow with clients increasingly reallocating funds to active high-yielding categories, anticipated pressure on fee income mainly in the passive investment space will likely impact assets under management (AUM) negatively in the upcoming release. We believe this should weigh slightly on revenues in the quarter.

Moreover, the probable sluggish AUM growth driven by shrinking market and elevated regulatory costs will likely reduce operating margin below the fourth-quarter 2014 margin level in the upcoming quarters in spite of expectations that higher growth in the ETF business will boost margins.

On the other hand, management remains optimistic about growth in its Aladdin platform as demand for multi-risk solutions and global investment platform consolidations remains strong. Also, management continues to experience improvement in its core ETFs business.

BlackRock's diversified footprint and strong product mix along with increased focus on organic growth has assisted it in improving revenue generation over the years, with the trend continuing in the first half of 2015 as well. We expect this top-line growth to continue in this quarter given the company's brand initiatives for the iShares and ETF business.

BlackRock's activities during the quarter proved inadequate to win analysts' confidence. As a result, the Zacks Consensus Estimate declined 3% to $4.58 per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that BlackRock is likely to beat the Zacks Consensus Estimate in the third quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for BlackRock is -1.09%. This is because the Most Accurate estimate of $4.53 per share is below the Zacks Consensus Estimate of $4.58 per share.

Zacks Rank: BlackRock carries a Zacks Rank #5 (Strong Sell). We caution against stocks with a Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in the upcoming announcements:

Ally Financial Inc. ALLY has an Earnings ESP of +1.92% and carries a Zacks Rank #2. It is scheduled to report results on Oct 29.

PartnerRe Ltd. PRE has an Earnings ESP of +70.72% and carries a Zacks Rank #1. It is scheduled to report results on Oct 26.

The Chubb Corporation CB has an Earnings ESP of +13.51% and a Zacks Rank #1. It is slated to report results on Oct 20.

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BLACKROCK INC (BLK): Free Stock Analysis Report

ALLY FINANCIAL (ALLY): Free Stock Analysis Report

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


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

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