The reason for 30%-plus rise in BlackRock (NYSE: BLK ) shares from their mid-August low to today could be because the fund manager provided investors a solid place to stand during stormy markets. The company's third-quarter earnings, released Wednesday, simply emphasized this.
On a GAAP basis, BlackRock produced $1.94 in earnings per share in the third quarter on revenue of $1.3 billion. The quarter also included significant one-time expenses, such as $128 million spent on insourcing the administration and servicing of some closed-end funds. Adjusting for these expenses, non-GAAP EPS was $2.29.
The company's strength came not only from growth in assets under management (AUM), which rose 6% sequentially, but also from an increase in performance fees, suggesting that BlackRock funds did well in navigating the recently choppy markets.
Picking apart the results
Comparing this quarter to the third quarter of 2006 gets a bit difficult, because of the acquisition of Merrill Lynch's (NYSE: MER ) investment management (MLIM) business. The transaction added a substantial amount of AUM to BlackRock, so the 302% increase in revenue, or the even larger jump in net income year over year, isn't particularly telling.
The MLIM transaction closed Sept. 29 of last year, though, so its AUM were already added in at the close of last year's third quarter. Since BlackRock's success is largely dictated by attracting new assets on which it can collect fees, looking at the changes in AUM over the past year can be very useful. Year over year, BlackRock's AUM have increased 21%, showing notable strength in cash management and equity and balanced products, both of which rose 27%.
The safe haven
The quarter-over-quarter 6% growth in AUM was also notable, given the tough market conditions. In fact, BlackRock's strongest product in terms of AUM growth was cash management, which includes good old money market funds. BlackRock added more than $30 billion in its cash management group, a 12% bump over just the prior quarter.
The company's performance in the face of a tough quarter for the financial markets is not only good for the bottom line now, it might also help attract more assets going forward. Continued turbulence in the markets might even provide a catalyst for BlackRock, as more individuals and institutions decide to outsource their investing. However, this may come at a cost; declining markets would have a negative effect on AUM as asset values decline.
BlackRock's performance is also positive for Merrill Lynch and PNC Financial Services (NYSE: PNC ) , both of which own a significant chunk of BlackRock.
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